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Trepp Releases Capital Adequacy Stress Test Report: One in Eight Banks at Risk
Oct 10 - Trepp, LLC, a provider of information, analytics and technology to the commercial real estate and banking markets, has released its first Capital Adequacy Stress Test Report of U.S. banks.
Trepp used its own model to evaluate the effects of stressing the balance sheets and income statements of more than 6,000 U.S. banks. This initial round of tests resulted in one in eight banks receiving a "failing grade." Trepp's model is adapted from the framework used by the Federal Reserve Bank's Comprehensive Capital Analysis Review Stress Testing of the 19 largest banking institutions in March 2012.
Trepp's Capital Adequacy Stress Test (T-CAST) combined individual bank data with severely adverse inputs to create "what-if" scenarios for earnings, capital and asset performance for a nine-quarter projection period.
"A significant number of banks are at risk of falling short of capital adequacy requirements unless they take some type of corrective action," said Trepp's lead bank analyst, Matt Anderson. "The report shows that the industry still has a way to go before a full recovery."
Using second quarter 2012 data, 784 of the 6,151 (12.7 percent) banks tested failed the Trepp stress test because they did not meet the minimum requirements for capital adequacy. A passing grade required a bank to maintain ratios in excess of regulator-defined thresholds assuming severe stress on 12 macroeconomic variables, including real GDP growth, unemployment, interest rates and home prices. For the banks that failed the test, Trepp estimates that an additional $25 to $27 billion of capital would be required in aggregate to achieve a passing grade.
Key Areas of Concern
The T-CAST Report underscores two key areas of concern: mid- and small-sized banks, and specific geographic pockets that have been hit hard with failures over the past two years. Of the total number of banks that failed the test, the highest percentages of failure were for banks with under $10 billion in assets. Looking at the regional breakdown of the banks that did not pass T-CAST reveals elevated risk for banks in states such as Georgia, Florida, Illinois and Minnesota.
Commercial real estate exposures also emerged as a significant driver, with CRE losses comprising nearly 40 percent of loan losses for banks that failed the test. Commercial and industrial lending represented a secondary source of distress, with 24 percent of forecasted losses for the banks that failed the test.
Trepp's stress test model was developed in response to the demand for increased government oversight of the banking industry following the 2008 crisis. These include the Dodd-Frank Act and Basel III reform measures established to create minimum capital requirements. While the full implementation deadlines for these reforms are still unfolding, their guidelines were applied to test minimum thresholds.
"Banks face a future where economic conditions and regulatory requirements are uncertain, yet both will have significant impacts on bank performance," Anderson said. "They should begin now to establish a basis for projecting capital adequacy over an extended forecast horizon."
Trepp's complete summary of its results can be found in the Q2 2012 Trepp Capital Adequacy Stress Test Report. The report can be requested at www.trepp.com/research.
The Q2 2012 Trepp Capital Adequacy Stress Test Report is compiled using Trepp's Bank Navigator data. Bank Navigator is a financial intelligence surveillance and risk assessment system that combines proprietary data and macroeconomic forecasts with bank financial information, regulatory data and performance history.
About Trepp, LLC
Trepp, LLC is a provider of information, analytics and technology to the CMBS, commercial real estate and banking markets. Trepp provides primary and secondary market participants the tools and insight they need to increase their operational efficiencies, information transparency and investment performance. For more information visit www.trepp.com.
About Trepp Bank Navigator
Trepp Bank Navigator is a comprehensive Web-based financial institution surveillance and risk management system. With detailed financial reports, risk scores and rankings on nearly 12,000 commercial banks, thrifts and bank holding companies, Bank Navigator is a robust tool for those concerned with bank financial performance and risk. The Bank Navigator is also a practical solution for developing successful enterprise risk management programs.