First take: DFAST stress testing

March 2014

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The DFAST results published yesterday (March 20th) are the Federal Reserve’s first stress test results released in 2014. Following this release, about half of banks disclosed their own company-run stress test results (required by March 31st). On March 26th, the Federal Reserve (Fed) will release its 2014 Comprehensive Capital Analysis and Review (CCAR) results.

  1. Improved industry capitalization.
  2. All but one of the 12 new BHCs fared well.
  3. Stressed Tier 1 Common ratios are lower at about half of the very largest banks – likely the impact of new Fed projections of assets, loans, and RWAs.
  4. Higher analyst payout expectations have likely caused a few banks to overshoot in their capital plans.
  5. Uncertainty remains around ultimate capital plan approval on March 26th.
  6. Counterparty credit shock has muted impact.
  7. Adverse scenario’s rising interest rate impact also minimal.
  8. Basel III standardized projected capital ratios show surprising strength.
  9. Loan loss rates improve from last year.
  10. Leverage Ratio is less of a binding constraint.

This First take elaborates on these key points.

“The average person who relies on the banking system should be happy. Next week will tell us whether banks and bank shareholders will be happy.”

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