SNL Financial Analysis Shows U.S. Banks Continue to Outperform Government Stress Tests

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Better-than-expected results put the nation’s largest banks in good position to prepare for the new Basel III capital requirements.

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The recent Basel III accords call for even higher capital standards, but since the stress tests forced roughly half the largest banks in the U.S. to bolster their capital levels, the exercise has helped to ensure that the institutions will likely have enough and, in some cases, more than enough capital to comply with new capital standards.

A new analysis from SNL Financial reveals that the banks that underwent last year’s government stress tests have sustained losses at substantially lower rates than assumed under the Supervisory Capital Assessment Program’s “more adverse scenario.” Through the first half of 2010, total net charge-offs for the 19 largest banks lagged the total loan loss assumptions in the stress tests on a prorated basis by roughly $112.05 billion, or 33.9%.

According to SNL data, the greatest discrepancy continued to be in first-lien mortgages, where losses tracked $48.34 billion, or 63% below the prorated SCAP assumptions, followed by commercial real estate at $19.49 billion, or 49%, below the estimate. The one area in which the banks exceeded the loss assumptions was in credit cards, with five institutions reporting higher-than-projected losses.

SNL’s analysis also shows that the stress-tested banks also managed to mitigate losses with their revenue streams at faster rates than assumed under the SCAP. The banks' pretax, pre-provision net revenue exceeded the assumptions by $81.72 billion, or close to 30% of projections. SNL data also shows that banks were able to shrink their balance sheets. While the stress tests had assumed that risk-weighted assets on banks' balance sheets would remain static through 2010, the median decline in the institutions' risk-weighted assets was nearly 11% from year-end 2008 through the first half of 2010.

“Last year’s stress tests aimed to ensure that the largest banks in the U.S. would have adequate capital to weather a severe downturn,” said JP O’Sullivan, Associate Director of Financial Services at SNL. “The recent Basel III accords call for even higher capital standards, but since the stress tests forced roughly half the largest banks in the U.S. to bolster their capital levels, the exercise has helped to ensure that the institutions will likely have enough and, in some cases, more than enough capital to comply with new capital standards.”

This data is available with a subscription to the SNL Unlimited Information Service for Financial Institutions. To learn more, contact sales(at)snl(dot)com or call 866.296.3743.

About SNL Financial
SNL Financial is a leading provider of financial information on more than 3,300 public companies and 50,000 private companies in the business sectors critical to the global economy: Banking, Financial Services, Insurance, Real Estate, Energy and Media & Communications. The SNL information service integrates breaking news, comprehensive data and expert analysis into an electronic database available online and updated around the clock. For more information, visit http://www.snl.com.

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