For its next round of stress tests for the 19 largest US bank holding companies, the Federal Reserve has introduced some new twists, but has also thrown a gift to the banks that may face rejection of their initial plans to return capital to investors.
Companies that had their initial 2012 capital plans in March rejected in full or in part, including Citigroup
During the next round of stress tests, banks with capital plans rejected by the Federal Reserve will receive feedback during the stress test process and can lower their capital return plans before the Fed approves or rejects the capital plans, increasing the chances of modest -- or better -- returns of capital to investors.
According to Credit Suisse analyst Craig Seigenthaler, this "one-time adjustment" option will enable banks whose initial 2012 capital returns were rejected, as well as banks like Regions Financial
For the 2012 stress tests conducted during the first quarter, the Federal Reserve used an "Adverse Scenario" that included real US GDP contracting "sharply through late 2012, with the unemployment rate reaching a peak of just over 13% in mid-2013," while also assuming "that US equity prices
In order to have their capital plans approved, the banks subjected to the stress tests had to show that their estimated Tier 1 capital ratios at the end of 2013 would remain above 5%, "with all proposed capital actions through Q4 2013."
For the next round of stress tests, the Fed requires bank holding companies to show that they can maintain a "Tier 1 common ratio of 5% on a pro forma basis under expected and stressful conditions throughout the planning horizon," which includes a far less severe Adverse Scenario than the previous round of stress tests, but also includes a new "Severely Adverse Scenario."