Fed test: SunTrust could survive deep recession without a bailout

Stressed out

Here are the final reserves the Federal Reserve projected after a hypothetical severe recession for the largest banks operating in metro Atlanta. Banks “pass” if their reserves exceed 4.5 percent of their assets.

SunTrust 7.5 percent

Bank of America 8.1 percent

Wells Fargo 7.2 percent

BB&T 6.9 percent

Regions 7.3 percent

Note: Synovus, the fourth-largest player in metro Atlanta, was not included in the Federal Reserve’s stress test.

SunTrust Banks could lose billions of dollars but still survive a severe downturn rivaling the Great Recession without needing a government bailout, according to the latest government “stress test.”

The Atlanta-based bank was among 33 of the nation’s biggest banks included in the Federal Reserve’s analysis of a worst-case scenario in which the stock market drops 50 percent, real estate values plunge, unemployment doubles and key interest rates fall into negative territory.

The Fed also said it approved 30 of the 33 banks’ so-called “capital plans,” including SunTrust’s, to continue paying dividends and buying back shares, which could affect their ability to weather a recession.

SunTrust said it plans to boost its dividend by 8 percent later this year, and to repurchase $960 million of its stock over the next year.

“Our strong capital position and improved financial performance have enabled us to deliver a key component of the investment thesis in SunTrust – increasing the return of capital to our shareholders,” SunTrust CEO William H. Rogers, Jr. said in a press release.

The Fed projected that in a severe downturn the banks would lose a lot of money — $526 billion altogether — but found they all would have enough capital to survive.

The test indicated that SunTrust could survive a loss bigger than it suffered during the 2007-2009 financial crisis, when it got a $4.8 billion government bailout, because it has bigger reserves now than before the Great Recession.

The Fed projected that the bank would lose $2.4 billion before taxes during a roughly two-year “severely adverse” scenario but would still have investor money and other capital equal to about 7.5 percent of its assets — above the 4.5 percent federal minimum.

Last week’s decision by the United Kingdom’s voters to exit the European Union — a shock to many — is the latest reminder of why the government stress tests were put in place.

After the so-called “Brexit” vote, U.S. banks’ shares initially dropped around 10 percent — more than most companies’ stocks did. The bank stocks have only partially rebounded.

The U.S. stress tests became an annual ritual after the Great Recession, when banks lost billions of dollars on soured loans as home foreclosures soared, real estate values plunged and developers went bankrupt.

SunTrust lost almost $1.6 billion in 2009. Like many other banks across the nation, SunTrust got a federal bailout totaling $4.8 billion, which it eventually paid back as the economy recovered.

The stress tests, called for under the federal Dodd-Frank law, are aimed at avoiding a repeat of such bailouts.

Regulators also have beefed up scrutiny and required banks to increase their capital reserves and to cut some risky lending and trading activities that were blamed for worsening the financial crisis.