David Reilly reports on the Fed’s latest stress tests:
The passes show how far big U.S. banks have come since the financial crisis. But capital levels seen under the tests, and taking into account the capital-return plans, weren’t especially strong. Tier 1 common ratios for J.P. Morgan and Goldman, for example, were only marginally above the 5% minimum needed.
What’s more, leverage ratios including capital returns are particularly thin: Of the six biggest banks, four had ratios below 5%. While above the test’s 3% minimum, such levels wouldn’t give banks tremendous room to maneuver in a crisis.
The leverage ratios are particularly telling because they don’t allow for risk-weighting of assets. That approach is coming under increased criticism for potentially allowing banks to mask the true level of risk on their books.
Read more at HEARD ON THE STREET: J.P. Morgan, Goldman Get a Dose of Fed's Reserve – WSJ.com.