The stress tests examined the adequacy of capital and the ability of banks to survive and continue lending to businesses and households. Sound capital levels are essential to ensure that financial institutions have the capability to meet financial obligations, particularly under economic stress.
The banks were tested under conditions of a 13 percent unemployment rate, 50 percent fall in equity prices and 21 percent decrease in housing prices. Losses were estimated to be approximately $534 billion for the nine quarters over which the economic hypothetical would occur.
Capital levels for 15 of 19 banks tested, following the hypothetical economic scenario, exceeded all four regulatory minimum requirements, even in the event of share buybacks and increases in dividends.
Ultimately, this reflects a large capital increase since the last stress tests in 2009. The 19 banks that underwent stress tests in 2011 and 2012 have increased tier 1 common capital levels, which compare high-quality capital to risk-weighted assets. Since the first quarter of 2009, the firms increased tier 1 common capital levels by $339 billion by the fourth quarter of 2011.
The stronger capital is representative of the lower capital distributions by holding companies, resulting from the Federal Reserve’s actions to ensure that financial institutions eliminated or reduced dividends to maintain financial soundness. The stress tests are just one component that the Federal Reserve uses to examine capital distribution. Other components of the evaluation include the institution’s capital planning and ability to meet international capital agreements beginning in 2013.