Credit Suisse Trips Up in Fed Stress Test

After the Federal Reserve’s annual stress test, this week, Credit Suisse was the only bank on Wall Street that did not prosper. Obviously, this puts them leagues behind direct competitors like JP Morgan Chase and Bank America, both of whom got approval to shore up dividends and share buybacks. 

Every year, the Fed conducts a “stress test”. It is designed to put 18 of the biggest financial institutions operating in the United States under simulated rigors to show they will survive an economic downturn while still being able to offer loans and pay their dividends. These factors hinge on capital—the difference between liabilities and assets—which help to soften, and hopefully lessen, losses. 

In this year’s Fed stress test, every bank won approval to boost shareholder value based on the capital plans they submitted. That is to say, every bank except for Credit Suisse who, instead, received a “conditional non-objection.” This is the same rating the Fed gave both Goldman Sachs and Morgan Stanley, last year.  In 2018, these two US-based investment banks trickled below the minimum capital levels required in a stressed economic scenario. 

Now, it is important to note that while Credit Suisse did not “pass” the stress test this year, neither did they “fail” the test. The designation they received is more of a purgatory between pass and fail. Again, it is provisional; which means, they need only fulfill the requirements set forth after the test, and their rating will be upgraded to passing. 

Apparently, the US division of the Zurich-based Credit Suisse has to address issues the Fed uncovered in the bank’s capital planning processes.  According to the Federal Reserve, they found this problem in October of last year. More specifically, the Fed discerned the bank has weaknesses tied to some assumptions the institution had made for trading losses under the more stressed scenarios.  The Fed says, now, Credit Suisse must maintain capital distributions at its 2018 level until it satisfies the central bank’s objectives. 

All in all, though, this year’s stress test seems to indicate a resilient banking industry.  Fed vice chair for supervision, Randal Quarles, comments, “The stress tests have confirmed that the largest banks are both well capitalized and place a high priority on strong capital planning practices.  The results show that these firms and our financial system are resilient in normal times and under stress.”

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