Stressing Over Stress Tests

By Patrick Sims, (202) 822-1205, psims@hamiltonps.com

In the coming days, the Federal Reserve will release the results of the annual Comprehensive Capital Analysis and Review (CCAR), better known as “stress tests,” for the largest bank-holding companies (BHCs) in the U.S. The regulation requires top-tier BHCs with total consolidated assets of $50 billion or more to submit capital plans based on adverse scenarios. Plans were required for submission on January 9, 2012. The Federal Reserve is expected to release results by March 15.

Even prior to knowing the results of the tests, there are ways to assess the strength of banks and understand what has changed since the crisis.ﾠ As outlined in the new Hamilton Financial Index (The report was commissioned by the Partnership for a Sound Financial Future and can be read here), capital levels for U.S. financial institutions are at an all-time high, and the level of risky assets has diminished considerably since the crisis.

Key Takeaways:

• As of the fourth quarter of 2011, the industry’s Tier 1 Common Capital Ratio was at 12.56, an all-time high, and a 36 percent increase from its low-point in 2007
• If capital levels at the time of the financial crisis were at current levels, the industry would have been better prepared to withstand financial stress
• While the CCAR results may lead to some company-specific restrictions, we expect the results will be overall favorable for the financial industry

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For further reading and insight in to the Fed’s stress tests, please readﾠfull client note here.

Patrick Sims is a Director of Research at Hamilton Place Strategies. Prior to joining HPS, Patrick acted as the lead research analyst in the financial institutions’ group at SNL Financial and worked for the CFA Institute. He is a finance and international business graduate of James Madison University and studied EU Policy at the University of Salamanca, Spain.