The Federal Reserve’s latest stress test found that most of the 18 biggest banks in the U.S. could withstand a catastrophe. The Fed said yesterday 17 of those banks had enough capital on hand to survive a severe market collapse and economic recession.
In the Fed’s hypothetical scenario, in which unemployment rose to 12.1%, stocks dropped 50%, housing prices declined 20%, and banks lost a collective $462 billion, only Ally Financial failed. The former General Motors captive, the analysis showed, would come out of the fictional crisis with its high-quality capital comprising less than 5% of its risk-adjusted assets, the lowest “capital ratio” to pass.
Citigroup led the biggest banks with 8.3% capital ratio, followed by JPMorgan Chase (6.3%), while the smaller Bank of New York Mellon, with a 13.2% ratio, would fare best.
The stress test comes on the heels of the Consumer Financial Protection Bureau recently telling Ally Financial it’s being examined for certain “retail financing practices.” The bank said last week in an annual 10-K filing with the U.S. Securities and Exchange Commission that action may be taken against the company following the investigation.
Ally’s lending includes retail financing and leasing for new and used autos for consumers. As reported last month, the CFPB sent letters to at least four banks over seemingly discriminatory vehicle loans and interest-rate markups by dealers, though it is unknown if Ally was one of those four.
The U.S. government owns 74% of Ally following a series of bailouts during the financial crisis.
An Ally spokeswoman declined further comment to AutoFinanceNews.net beyond the 10-K filing, but the company issued a statement today saying it believes the Fed’s analysis of its capital adequacy for the Dodd-Frank Act Stress Test (DFAST) is “fundamentally flawed” and inconsistent with historical experience in the “most stressed periods in our business.”
Ally said in the statement that the flawed hypotheses could leave long-term unfavorable impacts on the economy, which could cause banks to diminish key lending categories such as the auto finance sector, one of the best-performing asset classes during downturns.
The bank closed its statement saying that if the Fed has such concerns about Ally’s capital competence, “it can immediately initiate a conversion of approximately $5.9 billion of existing capital that can be fully converted into Tier 1 common equity at their discretion.”
