These tests were the most rigorous so far. The Fed's assumptions were that unemployment jumped to 13%, real estate prices fell by 21%, and equity prices fell by half. After this "worst" case scenario, only 4 of the 19 banks were found to have insufficient capital. Among the 19 banks, they have current aggregate tier one capital coverage of 10.1%, and under the stress test, that number would fall (in aggregate) to 6.3%, above the 5% minimum.
The losers were MetLife, Citibank, Ally (formerly GMAC), & SunTrust. More importantly, there was a spectacular winner and I'm not talking about what would happen in another downturn. Bank of America's stock price took off like a rocket this week, ever since JPM got the scoop on the Fed's announcement Tuesday:
The WSJ included the following graphic in a Wedensday article about the results of the test. This shows the strength of the banks' balance sheets in the Fed's 2012 stress test, as well as what they were in 2009's test:
As you can see from the report, all banks have significantly improved their positions over 2009. However, I think that as it's been mostly bad news out of BAC, people were more pessimistic than they should have been. CEO Brian Moynihan has brought BAC back from the brink by shedding non-core assets and repairing the balance sheet. A giant pile of money from the taxpayer never hurts, but I think this test makes clear that you also need good leadership at the top. I'm hesitant to put more money into BAC stock, even though it looks poised for more gains.
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