Four US banks fail the stress tests showing low reliability in case of new financial shock

Four of the 19 largest financial institutions overseas failed the stress tests of the Federal reserve, reported Bloomberg. Among them is the third largest U.S. bank Citigroup, which received the highest government aid of $ 45 bn for its bailing out after 2008-2009. The rest poor test performers involve Sun Trust, Ally Financial and Met Life, which were also aided by the state after the financial collapse of Lehman Brothers.

These institutions failed to prove that in case of a hypothetical market failure, leading to 13% unemployment, 50% decline in stock prices and 21% drop in real estate prices, they will dispose of the necessary capital for their operation.

They had to show the Fed that in case of a similar financial collapse, their common capital ratio (Tier 1) will not slump below 5% compared with the amount of risky assets in their portfolios. Citigroup's Tier 1 capital ratio is 4.9%, while that of Ally and SunTrust stands at 4.4% and 4.8% respectively. The ratio of MetLife reached 6%. In fact, the banks with the best Tier 1 ratio are The Bank of New York Mellon with 13.1% ratio, as well as State Street with 12.5% ​​and American Express with 10.8%. Among the best performers is also JPMorgan, which urged regulators to allow banks to increase their profits in order to buy back their shares. Bank of America, which is the second largest US bank, also passed the stress tests, but did not demand an increase in proceeds so as to buy back its shares. Overall, in such a negative scenario, the 19 leading U.S. banks will record net losses (before the taxation) of some $534 bn by the end of 2013, while Bank of America and Citigroup will lose some $50 bn. Besides, Goldman Sachs, JP Morgan Chase, Morgna Stanley and Wells Fargo will each register a negative financial result of $19 bn.

The Federal reserve, in its turn, highlighted the fact that 15 out of the 19 largest financial institutions in the U.S. met the requirements of the authorities and had passed the stress tests. The Federal Reserve has been making stress tests since 2009 onwards, but for the first time the results are made public. This year's scenario was more difficult than in previous years because the Fed wants to be sure that the U.S. banks will be financially capable of meeting the new banking rules known as Basel III, which will enter into force in 2014. Therefore, the Federal Reserve reports that all tested banks are in a much stronger position now than they were immediatey after the financial crisis began in 2008.

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