Fed says 15 of the nation’s 19 largest financial firms are ready for the next recession.Â Citigroup and others could need more capital.
FORTUNE — The Federal Reserve said a majority of the nation’s largest banks would be able to weather another deep recession. Four banks, though, have more work to do.
In the stress test results it released on Tuesday afternoon, the Fed said that 15 of the nation’s 19 largest financial firms have enough capital to cover the losses they would have from bad loans should the economy have a severe double dip. Three banks – Ally Financial, Citigroup (C) and SunTrust (STI) – would likely need new capital from either investors or the government in the Fed’s adverse economic scenario. A fourth financial firm insurer Metlife, would likely be in need of assistance as well.
All told, the Fed said that the nation’s 19 largest banks could lose as much as $534 billion. The majority of that would come from soured loans and trading losses from a “global financial market shock.” The Fed said that the majority of banks would be able to absorb the losses because they have increased their collective capital by more than $300 billion since the start of 2009. “The capital positions of our banks have improved substantially in the past three years,” says a senior Fed official.
The Tier 1 common equity ratio of the nation’s largest banks, a key measure of bank health, would fall to an average of 6.3%, from a recent 10.1%. The Fed generally considers anything above 5% to indicate a healthy bank. Ally came out the worst in the Fed’s stress test. The Fed said its capital ratio could fall to half of the required amount. Among the nation’s six largest banks, Wells Fargo (WFC) came out of the test with the highest ratio of 6%.
Under the stress tests, the Fed estimated the losses the banks would have if the unemployment rate were to rise to 13%, home prices were to fall another 21%, and the stock market was to drop by half. The Fed said those conditions were an extreme negative scenario and not its actual outlook for the economy. It was the first time the Fed had released a thorough test of the banks’ financial health since the early days of the financial crisis.