Majority of banks pass Fed’s stress test

Daniel Tarullo

Daniel Tarullo

The Federal Reserve announced on Thursday that the largest banks in the U.S. are able to withstand a severe recession and are much better positioned for blunting economic shocks than before the financial crisis.

Out of 18 bank tested, only Ally Financial, Inc., was found to be at risk of failure under the Fed’s scenario. At the lowest point in the scenario’s severe recession simulation, Ally’s ratio of capital to risk-weighted assets would fall to 1.5 percent. The minimum level is five percent, theĀ Los Angeles Times reports.

For the remaining large banks tested, the ratio stayed above five percent. In total, the banks, which account for 70 percent of all U.S. banking assets, would be at 7.7 percent at the end of the non-quarter deep-recession scenario.

As of Sept. 30, banks stood at a combined 11.1 percent after falling to five precent at the end of 2008, according to the Los Angeles Times.

“The stress tests are a tool to gauge the resiliency of the financial sector,” Fed Governor Daniel K. Tarullo said, the Los Angeles Times reports. “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.”

Banks could not pass or fail the Fed’s stress test because it did not take certain important factors into account. The Fed will, however, give what is essentially a pass/fail grade for the banks based on additional information next week.