Fitch:US Banks Clear Stress Tests, Bigger Hurdle Awaits in CCAR

Yesterday's release of the Dodd-Frank Act Stress Test (DFAST) results showed all 31 U.S. bank holding companies passing minimum capital ratio requirements, demonstrating very modest improvements in projected loan losses and mostly wider margins of cushion above capital minimums, according to Fitch Ratings. DFAST is the first part of annual stress testing for the largest U.S. banks and is followed by results of the Comprehensive Capital Adequacy Review (CCAR), which overlays the banks' planned capital actions. The CCAR is to be released on March 11.

The Fed's weighted average minimum stressed Tier 1 common (T1C) capital ratio was 8.2% under the severely adverse scenario, up from 7.6% in last year's test. Banks also had a higher starting point for the ratio, averaging 11.9%, compared with 11.5% a year ago. Under the FED's adverse scenario, a more interest rate sensitive case, the average T1C minimum would drop to just 10.8%. This year's results included the added challenges of higher risk-weighted assets from projected asset and lending growth, the impact of increased equity volatility on market risk RWAs, as well as higher credit-related RWAs for some banks due to the phase-in of Basel III.

DFAST assumes each bank holds its existing dividends constant, whereas the CCAR overlays planned increases to dividends, share repurchase activity, and capital issuances or redemptions. While the large majority of banks fare well quantitatively under DFAST, the threat of a capital plan rejection under CCAR for qualitative reasons is a more significant hurdle for the banks. Such qualitative failures occurred last year for four institutions, even though each had exceeded all required quantitative thresholds. As regulators increase their risk management expectations regarding stress testing, the banking industry has significantly increased spending and resources dedicated to the processes.