8/22/2019 Stressing Over Stress Tests

http://slidepdf.com/reader/full/stressing-over-stress-tests 1/5

HPSinsight.com

80515thSt.NW,Suite700  Washington,DC20005

HPSInsight

March 12, 2012

ClientNote

STRESSING OVER STRESS TESTS

ByPatrickSims  ,(202)822-1205,psims@hamiltonps.com “Capitaliscentraltoabank-holdingcompany'sabilitytoabsorbunexpectedlosses

andcontinuetolendtocreditworthybusinessesandconsumers.” i–USFederalReserve

Inthecomingdays,theFederalReservewillreleasetheresultsoftheannualComprehensiveCapitalAnalysisandReview(CCAR),betterknownas“stresstests,”forthelargestbank-holdingcompanies(BHCs)intheU.S.Theregulationrequirestop-tierBHCswithtotalconsolidatedassetsof$50billionormoretosubmitcapital

plansbasedonadversescenarios.PlanswererequiredforsubmissiononJanuary9,2012.TheFederalReserveisexpectedtoreleaseresultsbyMarch15.Evenpriortoknowingtheresultsofthetests,therearewaystoassessthestrengthofbanksandunderstandwhathaschangedsincethecrisis.AsoutlinedinthenewHamiltonFinancialIndex(HFI),capitallevelsforU.S.financialinstitutionsareatanall-timehigh,andthelevelofriskyassetshasdiminishedconsiderablysincethecrisis.Whilecapitalizationoftheindustryisverydifferentthancompany-specificcapitalization,andresultswillvaryfromonebanktoanother,wecanlookata

snapshotofwheretheindustrycurrentlystands.StressTestingtheHFI

HPSInsight,theresearchdivisionofHamiltonPlaceStrategies,conductedourownsnapshotstress-testscenariothroughtherecentlyreleasedHamiltonFinancialIndex(ThereportwascommissionedbythePartnershipforaSoundFinancialFutureandcanbereadhere).Asanoverview,theHamiltonFinancialIndexismeasuredbyusingtwocommonlyacceptedmetrics:1.  TheSt.LouisFederalReserveFinancialStressIndex(STLFS),awell-

establishedindicatoroffinancialstresscapturing18marketindicators2.  Tier1CommonCapitalRatio(Tier1)forcommercialbanksmeasuring

financialinstitutions’abilitytoabsorbunexpectedlossesinanadverseenvironment

8/22/2019 Stressing Over Stress Tests

http://slidepdf.com/reader/full/stressing-over-stress-tests 2/5

HPSinsight.com

80515thSt.NW,Suite700  Washington,DC20005

HPSInsight

ThetrendoftheHFIisoutlinedbelow,andthesummaryisthattheindexisnowhigherthanitwaspre-crisis,whichindicatesstrengthinourfinancialsector.

Inthespiritofstress-testweek,wethoughtitwouldbeinterestingtostresstestourownstresstest.Todoso,welookedatthehypotheticalleveloftheHFIatitslowestpoint,thesecondquarterof2008,whilekeepingTierIconstantatitscurrentlevel.Thisshowshowcurrentcapitallevelsactasalargebuffertofinancialstress.Asofthefourthquarterof2011,theindustry’sTier1wasat12.56,anall-timehigh,anda36percentincreasefromitslow-pointin2007.Theresultsseenbelowareclear–atthetimeofthecrisis,theindexwouldhavehadavalueof.76,whichis.30pointshigherthanwhatactuallyoccurred.Inpastanalysis,weidentifiedtheaveragelevelofsafetyandsoundnesstobearoundtheindexvalueof1.Thedeclineattoday’slevelswouldhavebeen.24points,or24

percentbelowthehistoricalnorm,insteadoftheactualoutcomeofadeclineof.54points,or54percentawayfromnormal.Ifcapitallevelsatthetimeofthefinancialcrisiswereatcurrentlevels,theindustrywouldhavebeenmuchbetterpreparedtowithstandfinancialstress.

 !Exhibit!1 !THE HAMILTON FINANCIAL INDEX SHOWS CURRENT

CAPITAL LEVELS PROVIDE LARGER BUFFER FOR STRESS!

Source: HPS Insight, St. Louis Federal Reserve, SNL Financial!!

   I  n   d  e  x   V  a   l  u  e

1.50!

1.25!

1.00!

0.75!

0.50!

0.25!

1.15!

1.24!

   2   0   1   1

   2   0   1   0

   2   0   0   9

0.76!

0.46!

   2   0   0   8

   2   0   0   7

   2   0   0   6

   2   0   0   5

   2   0   0   4

   2   0   0   3

   2   0   0   2

   2   0   0   1

   2   0   0   0

   1   9   9   9

   1   9   9   8

   1   9   9   7

   1   9   9   6

   1   9   9   5

   1   9   9   4

Given today’s capitallevels, the Hamilton

Financial Index would be

30 points higher during

 the financial crisis of 

late-2008.!!The Tier 1 Common

Capital Ratio was at

12.56 as of the fourth

quarter of 2011, a 36

percent increase from its

low-point in 2007.!!

Hamilton Financial Index! Hypothetical*!Actual Value!

* Assumes 12.56% Tier 1

Common Capital ratio for all

 time periods!

8/22/2019 Stressing Over Stress Tests

http://slidepdf.com/reader/full/stressing-over-stress-tests 3/5

HPSinsight.com

80515thSt.NW,Suite700  Washington,DC20005

HPSInsight

FedStressTestExpectations

Financialindustryleaders,suchasJamieDimonofJPMorganChase,believethe

releaseofthestress-testscenarioswilleliminatequestionsofsafety.Ifbankscandemonstratethattheyhavesufficientcapital,eveninthemostcatastrophicofscenarios,itwillbefurtherproofthatthefinancialindustryisbothsafeandsound.However,supervisorsdohavetheauthoritytorestrictcapitaldistributions(dividends)andrequireinstitutionsto“takeactionstoimproveitscapitaladequacy.”AsaresultofCCAR2011,regulatorsrejectedproposeddividendincreasebybothBankofAmericaCorp.andCapitalOneFinancialCorp.WhiletheCCARresultsmayleadtosomerestrictionconsideringthedifferencesacrosscompaniesduetodisparitiesincapitalization,weexpecttheresultswillbe

overallfavorableforthefinancialindustry.Belowisadditionalbackgroundonthestressscenariosandthethresholdsexpectedoffinancialinstitutions.CCARStressScenarios

Outlinedbelowaresomeofthestress-testscenariosasidentifiedbytheFederalReserve:“All[stresstest]scenariosstartinthefourthquarterof2011andextendthrough

thefourthquarterof2014.”

•  DecreaseinGDP:AnannualizeddeclineinrealU.S.GDPof4.84percentinthefourthquarterof2011,7.98percentinthefirstquarterof2012,4.23percentinthesecondquarterof2012and3.51percentinthethirdquarterof2012beforelevelingoutandthenincreasingfromthereuntiltheendofthescenario

•  IncreaseinUnemployment:Theunemploymentratepeaksat13.05percentinthesecondquarterof2013

•  StockMarketCrash:TheDowJonesTotalStockMarketIndexfallsto5,668.34inthefourthquarterof2012

• DropinCommercialRealEstate:A23percentdeclineby2013

•  HousingPricesPlummet:Pricesfall20percentby2014•  GlobalEconomicMalaise:Domesticeconomicstresswithfluctuationsinthe

euro-areamarket,Japan,developingAsia(HongKong,Taiwan,ChinaandIndia)andtheUnitedKingdomthroughoutthetestingtimehorizon

Anadditionalanalysiswilltakeplaceforsixofthefirmswiththelargesttradingoperations.Thisanalysiswillbebasedon“globalmarketshocks,”basedonprice

8/22/2019 Stressing Over Stress Tests

http://slidepdf.com/reader/full/stressing-over-stress-tests 4/5

HPSinsight.com

80515thSt.NW,Suite700  Washington,DC20005

HPSInsight

andratemovementsthatoccurredinthesecondhalfof2008,aroundthetimeoftheLehmanBrother’sfailure.

FactsandFiguresNineteenofthe31firmstookpartinCCARin2011,andanother12morewereaddedforthe2012scenario.Whiletheindustryhasquestionedthefullextentofwhatwillbereleased,theofficialCCARmanualstatesthat“…atthecompletionoftheexercise,theFederalReservewilldiscloseitsestimatesofrevenuesandlosses,aswellasproforma,poststresscapitalratios…”The31companiesareexpected“...tomaintaincapitalaboveeachminimum

regulatoryratioandabovea5percenttier1commonratiounderexpectedandstressfulconditions,withstresstestingcarriedoutbothbythefirmsandtheFederalReserve.”Asofthefourthquarterof2011,theaverageTier1CommonCapitalRatioforthe31financialinstitutionswas10.97,up36.6percentfromthefirstquarterof2009.Thehighestratioamongthegroupwas16.84,whilethelowestwas6.86.(Exhibit2)

8/22/2019 Stressing Over Stress Tests

http://slidepdf.com/reader/full/stressing-over-stress-tests 5/5

HPSinsight.com

80515thSt.NW,Suite700  Washington,DC20005

HPSInsight

Tier 1 Common Ratio

Company 2011Q4 2011Q1 2010Q1 2009Q1

Ally Financial Inc. 7.54 8.40 4.96 NA

American Express Company (AXP) 12.31 11.81 9.75 11.44

Bank of America Corporation (BAC) 9.86 8.64 7.61 4.47

Bank of New York Mellon Corporation (BK) 13.43 12.36 11.62 10.05

BB&T Corporation (BBT) 9.74 9.32 8.64 6.99

Capital One Financial Corporation (COF) 9.67 8.40 6.54 7.66

Citigroup Inc. (C) 11.80 11.34 9.11 2.16

Fifth Third Bancorp (FITB) 9.35 8.99 6.96 4.50

Goldman Sachs Group, Inc. (GS) 12.07 12.79 12.40 8.47

 JPMorgan Chase & Co. (JPM) 10.07 10.03 9.06 6.88

KeyCorp (KEY) 11.26 10.74 7.51 5.62

MetLife, Inc. (MET) 9.39 7.82 8.81 9.19

Morgan Stanley (MS) 13.01 8.94 NA 6.19

PNC Financial Services Group, Inc. (PNC) 10.29 10.31 7.86 5.01Regions Financial Corporation (RF) 8.51 7.92 7.13 NA

State Street Corporation (STT) 16.84 17.46 15.93 14.75

SunTrust Banks, Inc. (STI) 9.28 9.05 7.70 5.83

U.S. Bancorp (USB) 8.55 8.18 7.08 5.44

 Wells Fargo & Company (WFC) 9.36 8.78 6.96 3.30

BBVA USA Bancshares, Inc. 11.18 11.71 9.32 7.44

BMO Financial Corp. 9.93 12.12 10.14 8.23

Citizens Financial Group, Inc. 13.34 13.01 11.38 7.47

Comerica Incorporated (CMA) 10.37 10.35 9.56 7.31

Discover Financial Services (DFS) 13.03 12.45 11.24 NA

HSBC North America Holdings Inc. 13.43 12.55 11.34 6.46

Huntington Bancshares Incorporated (HBAN) 10.00 9.75 6.55 5.67

M&T Bank Corporation (MTB) 6.86 6.79 5.90 5.99

Northern Trust Corporation (NTRS) 12.06 12.99 12.83 10.13

RBC USA Holdco Corporation 14.17 14.86 NA NAUnionBanCal Corporation 13.82 12.84 11.96 8.72

Zions Bancorporation (ZION) 9.57 9.33 7.14 5.73

Average 10.97 10.65 9.07 7.08

High 16.84 17.46 15.93 14.75

Low 6.86 6.79 4.96 2.16

As of March 5, 2012.

List includes Bank Holding Companies with at least $50 billion in total assets.

Data collected from regulatory filings.

Source: SNL Financial

Tier 1 Common Ratio for 31 BHCs in Fed's Comprehensive Capital

Analysis and Review (2012)

PatrickSimsisasenioranalystatHamiltonPlaceStrategies.PriortojoiningHPS,

Patrickactedasaleadresearchanalystinthefinancialinstitutions’groupatSNL

FinancialLLCandworkedfortheCFAInstitute.HeisaFinanceandInternationalBusinessgraduateofJamesMadisonUniversityandstudiedEUPolicyattheUniversity

ofSalamancainSpain.