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Market Update

No Surprises in Fed's Stress Test Results

As expected, the Federal Reserve's latest round of stress tests shows that the big banks are much better-equipped to handle an economic downtown than they were five years ago.

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Late Thursday, the Fed released the results from the supervisory stress tests conducted as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. As expected, nearly all of the nation’s largest banks subject to the supervisory stress test passed. Out of the 30 banks subject to the stress test, 29 of the banks passed as the minimum of their Tier 1 common ratio stayed above the 5% level under the stress-case conditions. The only bank to not meet this hurdle was  Zions Bancorporation (ZION)

The results are no surprise to us, as they are generally in line with Morningstar's own Stress Test analysis. Under the Federal Reserve’s stress test, Zions would have a Tier 1 common ratio of less than 5%. For example, besides Zions, the two worst banks in the Fed's stress test were  Bank of America (BAC) and  M&T Bank Corp (MTB), which ended up with stressed Tier 1 common ratios of 6.0% and 5.9%, respectively. Our credit ratings on both of these banks are comparatively low, due in part to M&T's relatively low level of current tangible capital compared to peers, and Bank of America's still middling profitability and lingering litigation expenses. That said, while these banks did perform below average, they are far from being "in trouble." The Fed noted in its press release that all the large banks are "collectively better-positioned to continue to lend to households and businesses and to meet their financial commitments in an extremely severe economic downturn than they were five years ago," which has been Morningstar's opinion of the large banks for some time.

Dan Werner does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.