Fed test: SunTrust would lose billions but survive a deep recession


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.

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 would lose billions of dollars but could survive a severe downturn rivaling the Great Recession without needing a government bailout, according to an annual government "stress test."

The Atlanta bank was among 33 of the nation’s biggest banks included in the Federal Reserve’s worst-case scenario in which the stock market dropped 50 percent, real estate values plunged, unemployment doubled, and key interest rates fell 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 Wednesday 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 the banks would lose a lot of money — $526 billion altogether — but said they all passed by having enough capital to survive a severe downturn.

The Fed's 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 the 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 — are the latest reminder of why the government stress tests were put in place after the Great Recession.

U.S. banks’ shares initially dropped around 10 percent after the so-called “Brexit” vote— more than most companies’ stocks — as a big drop in interest rates in the U.S. raised fears that banks’ profits would shrink.

Under the federal Dodd-Frank law, the stress tests became an annual ritual after the 2007-2009 financial crisis.

The Great Recession pitched millions out of work and caused real estate values to plunge. Banks lost billions of dollars on soured loans as home foreclosures soared and real estate 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 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.

The federal Dodd-Frank law requires the nation’s largest banks to go through a number of simulated scenarios to prove that they can survive a severe recession without needing another federal bailout.

The Federal Reserve usually changes the scenarios a bit each year to keep banks on their toes. This year’s test included negative interest rates after central banks in Europe and Japan recently pushed their benchmark interest rates below zero to try to revive their moribund economies.

Such low interest rates squeeze banks’ profits. Most banks make the bulk of their money from their net interest margins on loans, or the difference between the rates they earn on loans versus the rates they pay on customers’ deposits.