Fed stress tests stretch Goldman Sachs, HSBC  

US dealers toe binding minimums in latest DFAST exercise

Goldman Sachs and the US unit of HSBC came closest to failing this year’s Federal Reserve stress tests on key leverage ratio measures, Risk Quantum analysis shows.

All 23 participating firms that underwent the Fed’s severely adverse scenario reported stressed capital and leverage ratios above regulatory minimums. However, the two dealers came close to crossing the Fed’s red lines.

 

 

HSBC North America’s Tier 1 leverage ratio was projected to trough at 4.2% in the course of the nine-quarter simulated stress period, compared with a minimum requirement of 4%. The bank’s actual end-2020 ratio was 7.9%.

HSBC reported a post-stressed supplementary leverage ratio (SLR) of 3.3% and Goldman Sachs' was projected to drop to 3.9%, versus a minimum of 3%. The banks’ actual end-2020 ratios were 7.1% and 7%, respectively.

The Common Equity Tier 1 (CET1) ratio at HSBC was projected to trough at 7.3%, down from 14.8% at end-2020. The minimum stressed CET1 ratio needed to pass is 4.5%.

Credit Suisse USA was projected to undergo the biggest peak-to-trough fall in T1 leverage ratio. The bank was estimated to suffer a 390-basis point drop in its T1 leverage ratio in the course of the simulation – from a starting point of 13.7% to a minimum of 9.8%.

Deutsche Bank USA was projected to see its SLR plummet the most, by 480bp, from 13.6% to 8.8%. HSBC North America was estimated to see its CET1 ratio fall the most, by 750bp.

 

 

Credit Suisse USA boasted the highest minimum stressed T1 leverage ratio, at 9.8%. By the SLR measure, Deutsche Bank USA was the strongest performer, reporting a projected minimum of 8.8%. The bank also topped the table on the CET1 ratio measure, with a stressed minimum of 23.2%.

What is it?

The Dodd-Frank Act stress tests, now in their ninth year, subject the largest US banks to a series of economic shocks to test their resilience to a future financial crisis.

The Federal Reserve devises a fresh set of adverse and severely adverse supervisory scenarios each year to test dealers against a range of potential disasters. The scenarios are nine quarters in length, with banks having to maintain capital and leverage ratio minimums throughout the stressed period in order to pass.

This year’s severely adverse scenario simulated a deep global recession, together with an aversion to long-term, fixed-income assets. Yield curves were steepened in the US and a number of other countries under the scenario, while long-term rates remained elevated. US gross domestic product was projected to drop as much as 4% below its pre-recession level and the unemployment rate to peak at 10.75% in the third quarter of 2022. In addition, equity prices were projected to collapse by 55% at their lowest point and the US volatility index to hit 70, among other asset price gyrations. 

The results of the second round of stress tests, the Comprehensive Capital Analysis and Review (CCAR), are due to be published on June 28. These concern large bank holding companies, and factor in their own capital planning processes. A bank's CCAR performance dictates whether the Fed will greenlight their planned future capital distributions, making this a closely-watched stress test.

Who said what

“Over the past year, the Federal Reserve has run three stress tests with several different hypothetical recessions, and all have confirmed that the banking system is strongly positioned to support the ongoing recovery” – Randal K. Quarles, Federal Reserve Board vice-chair for supervision.

Why it matters

Large US dealers hurdled this year’s Fed stress tests with ease, and restrictions on dividends and buybacks imposed in the aftermath of the Covid-19 outbreak are expected to be lifted as a result.

However, analysts and shareholders alike will likely keep a close eye on the CCAR results when they are published on June 28. Last year, the Fed introduced a so-called stressed capital buffer (SCB) that replaced the previous pass/fail approach to CCAR, under which banks that passed were generally allowed to proceed with their original distribution plan.

Under the new framework, banks will receive a capital add-on equivalent to their worst-case capital deletion in the stress test, floored at 2.5%. This could set back hoped-for dividend payments and share buybacks.

After receiving their preliminary SCB charge, dealers will need to inform the Fed if they plan to make any adjustments to their capital plans, which might delay any capital distribution announcements.

Get in touch

Like Risk Quantum? Sign up for free to our daily newsletter and check @RiskQuantum for the latest updates.

If you have any thoughts on our latest analysis or want to suggest other ways to present and analyse the data, you can email us.

Tell me more

How buy-to-hold accounting shuffle boosts US bank capital

Fed’s second round of stress tests to push banks’ limits

Fix to Fed stress test snafu lowers two banks’ capital charges

View all regulator stories

  • LinkedIn  
  • Save this article
  • Print this page  

Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.

To access these options, along with all other subscription benefits, please contact [email protected] or view our subscription options here: http://subscriptions.risk.net/subscribe

You are currently unable to copy this content. Please contact [email protected] to find out more.

You need to sign in to use this feature. If you don’t have a Risk.net account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here: