On Monday, the Federal Reserve came up with the approval for
re-submitted capital plans of
The Goldman Sachs Group, Inc.
JPMorgan Chase & Co.
). Though previously Goldman and JPMorgan received the Fed's
approval for their proposed capital plans during the 2013
Comprehensive Capital Analysis and Review (CCAR), these banking
stalwarts were asked to resubmit the plan by the end of
third-quarter 2013, considering the weaknesses recognized in
their capital planning processes.
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Therefore, the Fed's approval signifies the financial stability
of these banks and their capital adequacy.
Currently authorized under the Dodd-Frank financial-services law,
the stress tests were first introduced after the 2008 financial
crisis. During this economic downturn, big financial institutions
like Lehman Brothers collapsed and several other big banks
including JPMorgan and
) were on the verge of a collapse. This compelled the U.S.
government to infuse billions of dollars into credit markets and
save the entire financial system from crumbling.
Among the 18 bank holding companies which submitted their capital
plan to the Fed in Jan 2013, the auto lender, Ally Financial,
majority-owned by U.S. taxpayers was the only bank which failed
to meet the minimum requirement of 5% Tier 1 common capital
Apart from Ally,
) capital plan had been rejected by the Fed based on certain
However, both these banks resubmitted their capital plans with
the Fed. Notably, BB&T received the approval in August, while
Ally's plan was approved last month.
On the Path to Recovery
This, however, is not the end. The big banks will have to undergo
the Fed's stress test once every year. These would help build up
the weak capital levels of banks, which are a looming threat to
the economy. Also, this could ultimately translate to less
involvement of the taxpayers' money for bailing out troubled
However, the government needs to etch out certain policies to
ensure that every industry participant contributes to the overall
profitability. While the bigger banks benefited greatly from the
various programs launched by the government, many smaller banks
are clambering to catch up.
The banking sector presented a better picture in 2013 compared to
2012. Improved economic data such as higher consumer spending and
GDP, improving housing market and declining unemployment rate
point towards optimism, but the current low-rate environment and
an expected increase show a bumpy road map toward growth.
Though economic uncertainty still lingers, banks are actively
responding to every legal and regulatory pressure. In fact, this
has positioned the banks well to encounter impending challenges.
As the sector's structure is undergoing a radical transformation,
it is expected to witness headwinds in the near to mid term.
However, entering the new capital regime will significantly
improve the industry's long-term stability and security. We look
forward to CCAR 2014 results, which are expected in Mar 2014.