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

A slew of big banks just passed another stress test, mandated under the Dodd-Frank reform law. This time, however, the tests weren’t overseen by the Federal Reserve, as they were during last March’s Comprehensive Capital Analysis and Review. These “mid-cycle” tests were both created and administered by the very same bank holding companies that took part in the Fed’s test — those with assets of $50 billion or more.

Bank of America Corp (NYSE:BAC)

How did megabanks like Bank of America Corp (NYSE:BAC), Citigroup Inc (NYSE:C), JPMorgan Chase & Co (NYSE:JPM), and Wells Fargo & Co (NYSE:WFC) fare with these self-generated, self-administered tests? Not surprisingly, they all passed with flying colors.

Surpassing achievements from the Fed’s CCAR review
The tests are supposed to gauge the health of each institution under stressful scenarios generated by the banks themselves. The Fed will use the information gleaned from the tests to assist in its supervision of the banks, but is otherwise staying out of the picture.

Clearly, it is much easier to ace a test when you generate the template, and the banks named above all sailed through without a hitch. All used a severely stressful nine-quarter scenario in order to test their individual mettle, and all came out with robust Tier 1 common capital ratios. Wells Fargo & Co (NYSE:WFC) emerged with a 10.3% cushion after suffering loan losses of nearly $30 billion, while JPMorgan Chase & Co (NYSE:JPM) still retained a ratio of 9.4% after a $32 billion hit.

Bank of America Corp (NYSE:BAC) and Citigroup Inc (NYSE:C) also triumphed — the former with a capital ratio of 9.2% on $36.8 billion in losses, and the latter sporting a 9.4% capital cushion while enduring a loss of $43.1 billion.

As for the Tier 1 common stressed minimum values, things are looking better yet:

Tier 1 Common Minimum Capital Ratios

Bank March 2013 CCAR Mid-Cycle Results
Bank of America 6.04 8.4
Citigroup 8.22 9.1
JPMorgan 5.56 8.5
Wells Fargo 5.94 9.9

Sources: Bank presentations, Federal Reserve.

Scenario differs slightly
Have banks really come that far, that fast? Except for Citigroup Inc (NYSE:C), the minimum capital ratios banks could expect to support under the severely adverse scenario are much higher now than they were at the end of last year.

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