U.S. banks could lose $462 billion in crisis

If unemployment soars and equity prices tumble, top U.S. banks should cope better than they would’ve before the financial crisis.

But that’s cold comfort considering the $462-billion loss they would face in such a severe scenario.

This heartening news comes courtesy the Federal Reserve, which today released the results of the Dodd-Frank stress tests on 18 banks.

Read: Pundits cynical about bank stress tests

The Fed tested what would happen if unemployment reached 12.1%, equity prices dropped more than 50%, housing prices fell more than 20%, and the largest trading firms experienced a sharp market shock.

The banks’ aggregate Tier 1 common capital ratio, which compares high-quality capital to risk-weighted assets, would fall from an actual 11.1% in Q3 2012 to 7.7% in Q4 2014 in the hypothetical stress scenario.

At least that’s better than the actual situation at the end of 2008, when the 18 firms together had a common ratio of 5.6%.

Read: Stress Testing Your Retirement Plan: “How Big is My Cushion?”

BNY Mellon and State Street would fare best, coming out with minimum stressed Tier 1 common ratios of 13.2% and 12.8%, respectively. Ally Bank would only have a ratio of capital to assets of 1.5%.

For a U.S. federal bank holding company to be considered well-capitalized, its Tier 1 ratio must be at least 6%, but Morgan Stanley, Goldman Sachs and Ally would fall under that threshold in the crisis.

The average common ratio of the 18 banks would be 7.4%.

Read: Preparing for the worst

Read the full stress test report here.

Melissa Shin

Melissa is the editorial director of Advisor.ca and leads Newcom Media Inc.’s group of financial publications. She has been with the team since 2011 and been recognized by PMAC and CFA Society Toronto for her reporting. Reach her at mshin@newcom.ca. You may also call or text 416-847-8038 to provide a confidential tip.