17 of 18 US banks pass stress tests

WASHINGTON (AFP) – All but one of 18 top US banks passed tough stress tests aimed at seeing if the financial industry could weather a new deep crisis, the Federal Reserve announced Thursday.

Government-controlled Ally Financial, the rescued former finance arm of General Motors, was the only bank to fail the test of capital strength.

Seventeen of the banks tested showed their capital levels would hold up above a five per cent minimum threshold if the economy were again rocked with the kind of crisis that sent the US financial system reeling in 2007-2008.

The test showed the banks collectively were much stronger than a year ago, with their aggregate common capital ratio holding up at 7.7 per cent, even after losing $462 billion in the theoretical crisis scenario.

“The stress tests are a tool to gauge the resiliency of the financial sector,” said Daniel Tarullo, a member of the Fed’s Board of Governors.

“Significant increases in both the quality and quantity of bank capital during the past four years help ensure that banks can continue to lend to consumers and businesses, even in times of economic difficulty”.

The tests measured the banks’ abilities individually and collectively to withstand a fresh crisis involving a 50 per cent plunge in equity prices, a fall of housing prices by 20 per cent, and unemployment shooting to 12.1 per cent, all of which would savage the banks’ loan and investment assets.

Starting from the third quarter 2012 level of 11.1 per cent, average Tier 1 common capital ratio – a measure of core equity capital against risk assets – sank to 7.7 per cent over nine quarters, the Fed said.