U.S. Says Only One Major Bank Would Fail in Another Financial Crisis

The Federal Reserve's latest round of stress tests on the biggest American banks shows they have enough money on hand to weather future crises – all except one that's been bailed out before.

U.S. Says Only One Major Bank Would Fail in Another Financial Crisis Photo (cc) by Pug50

Every year since the financial crisis of 2008, the federal government has tested major banking institutions to make sure they’re healthy enough to survive if it happened again. They just did another test, and one bank failed.

17 out of 18 passed, but Ally Financial didn’t come close to passing muster. Here’s how NPR describes the stress tests…

The tests simulate a nightmare scenario: How would the banks fare if unemployment topped 12 percent, stock prices were cut in half and housing values fell 20 percent? We all know what happened five years ago when a crisis was more than hypothetical.

The Federal Reserve estimates the banks should keep a minimum of a 5 percent capital buffer to protect themselves. (At the end of 2008, the top 18 U.S. banks had an average capital gauge of 5.6 percent, according to Reuters, and things looked dire then.) Ally’s result: just 1.5 percent.

Citigroup had 8.3 percent, JP Morgan Chase had 6.3 percent. Even the two lowest banks to pass the test, Morgan Stanley and Goldman Sachs, scraped by with 5.7 and 5.8 percent respectively. But Ally couldn’t even manage 2 percent.

That doesn’t mean Ally would definitely collapse without help – just that the government thinks it’s a realistic possibility given the amount of money they have on hand.

The company, formerly known as GMAC, received $16.3 billion in bailout money in 2008, on top of what General Motors got. Ally still owes taxpayers over $10 billion, according to ProPublica, and the government still has a majority stake in the company.

Reuters reports Ally’s response to the stress test: the analysis showed results “inconsistent with historical experience in the most stressed periods in our business.” They would say that. Maybe it’s time for another name change, guys.

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