JPMorgan Chase, which has been fighting to keep from getting smaller in the face of new capital requirements, passed the first round of the Federal Reserve’s 2015 stress tests — but it finished in the bottom 5 among the 31 big banks tested, according to the Fed’s results.
All 31 banks passed the first round, which tested each bank’s projected capital ratios under a severely adverse economic scenario. A passing score for tier 1 common capital ratios was 5 percent, and the lowest-ranked bank — Zions Bancorp — squeezed out 5.1 percent, below Morgan Stanley at 6.2 percent, Goldman Sachs and BBVA Compass at 6.3 percent, and JPMorgan Chase at 6.5 percent.
No other bank’s tier 1 capital ratio fell below 7 percent. The average for all 31 banks was 8.2 percent, with only 12 of the banks below the average. Among the top five banks, all were above 12 percent, including Northern Trust (12.3 percent), American Express (12.5 percent), Bank of New York/Mellon (12.6 percent), Discover Financial (13.9 percent), and a breathtaking 34.7 percent for Deutsche Bank.
Under the severely adverse scenario, loan losses at the 31 banks would total $340 billion over a nine-quarter period. That would result from a deep recession with 10 percent unemployment, a 25 percent drop in home prices and a 60 percent stock-market decline.
“The aggregate tier 1 common capital ratio would fall from an actual 11.9 percent in the third quarter of 2014 to a post-stress level of 8.4 percent in the fourth quarter of 2016,” the Fed’s report said, which is well above the 5.5 percent actually measured at the beginning of 2009.
While all the banks passed the tier 1 benchmark, other components of the test showed warning signs for some banks. In JPMorgan Chase’s case, it fell to a minimum level of 4.6 percent in the tier 1 leverage ratio, with only Morgan Stanley lower at 4.5 percent.
JPMorgan Chase CEO Jamie Dimon has fought to keep his big bank big at a time when other global banks have shed operations and some analysts have said JPMorgan Chase would be worth more broken up.
All banks with more than $50 billion are required to be part of the stress test, which is mandated by the Dodd-Frank Act. The 31 banks together hold more than 80 percent of domestic banking assets, the Feds said.
Although there are no penalties for failing this stress test, the numbers matter because they could affect the Fed’s final results for its Comprehensive Capital Assessment and Review (CCAR). In order to pass that, banks may need to make adjustments to their corporate financial plans, including how much they pay in dividends. CCAR results are due next Wednesday (March 11).