Bank of America Corp (BAC), Citigroup Inc (C): Surprise! Big Banks Pass Self-Administered Stress Tests

It’s true that banks have been working to bulk up their cushions. JPMorgan CEO Jamie Dimon noted that his bank expects to achieve a common ratio under Basel III of 9.5% by year’s end, based on the latest rules put forth by the Fed this past July. In its second-quarter earnings summary, Bank of America Corp (NYSE:BAC) also claims to have raised its Basel III common ratio to 9.6%, an increase from the prior quarter’s 9.52%.

While the banks are definitely making headway, it’s interesting that all four used a similar model for the projection of long-term interest rates — namely, that they would be heading downward during the scenario timeline.

This is, of course, the opposite of what is now happening, as well as a deviation from the previous Fed-supervised stress test, which specifically mentioned that both corporate borrowing rates and mortgage rates were to rise during the scenario’s timeline. Considering the effect rising rates are having on the mortgage refinance and origination business of the biggest banks — especially Wells and JPMorgan — using higher long-term rates may have been more realistic.

Still, this was a worthy exercise. Not only does it keep the issue of bank regulation and safety front and center, but it serves as a reminder of just how far the financial system has come since the crisis. Involving the banks in the creation of a stressful economic scenario, even if they give themselves a little break on the interest rate issue, keeps the remembrance of past mistakes fresh for the very institutions that need that timely reminder.

The article Surprise! Big Banks Pass Self-Administered Stress Tests originally appeared on Fool.com and is written by Amanda Alix.

Fool contributor Amanda Alix has no position in any stocks mentioned. The Motley Fool recommends Bank of America and Wells Fargo. The Motley Fool owns shares of Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo.

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