How Does Your Bank or Thrift Meet Stress Test Requirements for Safety and Soundness?

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The IDC stress test performed on 1,004 bank holding companies, 5,659 independent banks, and 1,223 savings banks and thrifts, based on 2nd quarter 2009 financial data, quantifies the need to immediately fail 510 financial institutions. To date in 2009, the FDIC closed 116 banks and thrifts.

Similar to the Federal government´s stress test, IDC estimated loan losses for each type of loan, and added it to the total loans 90 days past due or nonaccrual plus other real estate owned. From projected total loan losses, IDC subtracted the loan loss reserve and one year of pretax income and provision for loan losses. The resulting ratio of leverage Tier I capital, after deducting stress test projections, compared to a minimum required 4% Tier I leverage ratio, provided the required capital to be raised by each financial institution.

For those 92 bank holding companies with 150 subsidiary banks, 268 independent banks (not included in the bank holding companies test), and 43 thrifts, all with an IDC ranking of "1" (the lowest), the stress test projected a requirement for new capital of $37.7 billion or 18.5% of loans outstanding. These financial institutions with a quality rating of "1" (the lowest) out of 300 (the highest) are in dire shape, with huge projected new loan losses and capital requirements in the future. The FDIC is, therefore, required to close these 510 financial institutions, as quickly as placement of their deposits can be found.

The 105 bank holding companies, 464 independent banks and 57 thrifts ranked 2-74 (lowest ratios) have a 4.8% Tier I leverage ratio after deducting problem loans (net of loan loss reserves). To survive, however, these institutions will require a projected $18.8 billion in new capital or 5.9% of loans outstanding. Given the projected new loan delinquency, limited current capital net of problem loans, and the large amount of new capital required to be raised, many of these 626 financial institutions will fail in the next few years.

Banks and thrifts ranked over 74 in need of new capital (1,446 financial institutions), which are rated superior, excellent, average and even below average, are in reasonably good shape, sufficient to raise new capital, and survive. The remaining well capitalized, low risk financial institutions, include 542 bank holding companies, 3,922 independent commercial and savings banks, and 423 thrifts, and had zero new capital requirements under IDC´s stress test.

How does your bank or thrift rank? Is your financial institution among the 510 immediate failures or the next level of 626 projected failures?

For a CAMEL analysis as to the safety and soundness of your bank or thrift, review IDC Financial Publishing Inc´s website (www.idcfp.com) or call 1-800-525-5457.

Written by John E. Rickmeier, President of IDC Financial Publishing, Inc. John has provided economic analysis to the financial industry since 1984.