U.S. Bank, Wells Fargo Pass Fed’s “Stress Test”
U.S. Bancorp and Wells Fargo & Company are among the nation's bank-holding companies that have enough capital to survive another serious economic downturn, the Federal Reserve announced Tuesday.
The Fed gave 19 of the largest U.S. bank-holding companies a “stress test” that evaluates how well they might perform in a financial crisis. As part of the test, the Fed reviewed the banks' balance sheets to determine if they would have enough capital if an “extremely adverse” hypothetical economic scenario were to occur for a two-year period. The scenario included a peak national unemployment of 13 percent, a 50 percent drop in equity prices, and a 21 percent decline in home prices.
Fifteen of the 19 banks that were required to participate will maintain capital ratios that would meet minimum regulatory levels if such a crisis were to occur, according to the Fed. It estimated collective losses at the 19 bank-holding companies to total $534 million during the hypothetical crisis. Four banks did not pass the test: Citigroup, Inc., SunTrust Banks, Inc., Ally Financial, Inc., and MetLife, Inc.
After the stress test results were out, Minneapolis-based U.S. Bancorp-Minnesota's largest bank-holding company and the state's only company that was required to participate-announced Tuesday that it has approved a 56 percent increase in the annual dividend rate on its common stock to 78 cents per share. The company also said it will buy back up to 100 million shares of its own stock.
“[The results] confirm, once again, the fundamental strength of U.S. Bancorp's business model and capital position, even when viewed under a remarkably stressed hypothetical economic scenario,” U.S. Bancorp President and CEO Richard Davis said in a statement. “Looking ahead, we continue to see a slow, but steady, economic recovery, and we look forward to participating in the revitalization of our markets, while serving the needs of our customers and, importantly, rewarding our shareholders for their investment in our company.”
San Francisco-based Wells Fargo, which employs about 20,000 in Minnesota and is one of the state's largest employers, also announced Tuesday that it will nearly double its quarterly dividend from 12 cents a share to 22 cents a share.
The Fed can stop banks from paying stock dividends or buying back their own stock if they fail the stress test, according to an Associated Press report. The Fed can reportedly also force them to raise money by selling additional stock or issuing debt.
The Federal Reserve has been conducting annual bank stress tests since 2009. The Fed said that the tests help ensure that banking organizations have the ability to lend and to continue to meet their financial obligations even in times of economic difficulty. The 19 participating bank-holding companies have collectively increased their capital levels from $420 billion in the first quarter of 2009 to $759 billion in the fourth quarter of 2011, according to the Fed.