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CBA Statement on “Stress Test” Results
Jun.27.2009
Results of the government’s stress test, released today, showed that all 19 tested institutions are currently considered “well capitalized,” and only one will be required to raise additional funds to buffer against potential future losses. Breaking the results down, the subjected institutions could be categorized in one of three ways. Nine of the 19 institutions were given a clean bill of health and do not need any additional capital. Another 9 can meet their capital needs internally by converting existing government investment funds into common stock if desired. Those banks could also sell off assets or raise private funds if desired. Only one institution will be required to seek additional outside funds: GMAC, the finance company tied to GM Motors. “These results should give us all confidence in our banking system and qualm the harmful speculation we have seen over the past months. The tests have shown that the banking industry is well positioned to thrive even within the government’s theoretical doomsday scenario, ” stated Don Childears, President/CEO of the Colorado Bankers Association. ### The Colorado Bankers Association represents over 90% of the $100 billion in assets within the 190 Colorado banks. On behalf of the 23,000 men and women who work in Colorado’s banks CBA works with government seeking a better banking industry in this rapidly changing environment. CBA also provides banking-specific information and education, offers bank insurance, anti-fraud efforts, and numerous other miscellaneous services. Stress Test BACKGROUND/FAQ What is the “stress test?” On Feb 25th, the Federal government implemented a stress test on our country’s 19 largest banks – not to see if one of these banks will fail, that was never a concern – but to see if a bank will prosper and proactively contribute to our country’s recovery, if we encounter more dire economic conditions. It was essentially asking one general question – will the bank still be able to lend to customers, and help our economy, if we encounter huge, unlikely losses due to extreme economic conditions? Specifically, the bank holding companies were asked to project their credit losses and revenues for the two years 2009 and 2010, including the level of reserves that would be needed at the end of 2010 to cover expected losses in 2011, under the two alternative economic scenarios: the “baseline scenario” and the “more adverse scenario”. The baseline scenario reflected the consensus expectation, as of February 2009, among professional forecasters, on the depth and duration of our country’s recession. The more adverse scenario was designed to characterize a recession that is significantly longer and more severe than the consensus expectation. The firms were also asked to provide supporting documentation for their projected losses and resources, including information on projected income. Shorter explanation The results which were released tested banks ability to absorb unlikely losses in a rigorous two-year economic scenario that is not a prediction or an expected outcome for the economy, but is instead an unlikely, pessimistic “what if” scenario. What was the Government’s Goal? The Stress Test was a months-long process designed by the Obama administration to restore confidence in the banking industry by illustrating that our largest banks will be able to survive whatever the economy throws at them – even if it entails forcing some to acquire additional capital. What should we expect? The Stress Test helped banks project how much additional capital they might need in the worst of economic conditions over the next couple years. It says nothing about a bank’s current solvency and viability. Banks that need to augment their capital buffers must develop a detailed capital plan by June 8 and implement that plan by Nov. 9. A bank that needs a larger capital cushion to continue lending will have several options, including selling additional stock, converting preferred stock into common stock, or selling assets. A combination of these steps likely will enable banks needing more capital to avoid additional government investments. Stress tests are nothing new. Banks perform them all the time, and the regulators are conducting them all the time. While the particulars will vary from test to test, the main things that are new about the current tests are the public discussion of the tests and the simultaneous testing of the largest banks in the country. What types of economic conditions did the government test against? The government assumed certain macroeconomic conditions such as 10.3% unemployment which would then translate into highly exaggerated and unlikely loss rates on banks’ portfolios. For instance, the more adverse test reportedly assumed a loss on credit card portfolios over the next two years of 25%, whereas losses on credit card portfolios over the past 10 years have averaged less than 5% per year. MEDIA CONTACT: Tim Powers 303 825 1575 .(JavaScript must be enabled to view this email address)