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Bank of New York Mellon tops list of banks passing stress test

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Thursday, March 7, 2013, 7:27 p.m.

The Federal Reserve said 17 of the nation's 18 largest banks could withstand a deep recession and maintain capital above a regulatory minimum that banks are required to set aside as a buffer to protect them against possible losses.

Three banks with a strong Pittsburgh connection were among the banks with the strongest capital levels.

Bank of New York Mellon, based in New York and with 7,600 employees in the Pittsburgh region, topped the Fed's list with a Tier I common capital ratio of 13.2 percent of assets. The ratio is a measure of financial strength and represents the cushion of money held above what is owed to depositors. A BNY Mellon spokesman declined to comment.

PNC Financial Services Group Inc., based in Pittsburgh where it employs 7,500, was fifth on the Fed list with a ratio of 8.7 percent. PNC issued a statement with its own estimate of 7.9 percent. A spokesman declined to comment.

Fifth Third Bancorp., based in Cincinnati with 15 offices in the Pittsburgh area, was sixth with a ratio of 8.6 percent.

Only Ally Financial Inc., the auto lender majority-owned by taxpayers, fell below a 5 percent Tier 1 common ratio, a regulatory minimum and measure of financial strength, according to data released Thursday by the central bank in Washington. Morgan Stanley showed a minimum Tier 1 common ratio of 5.7 percent in the test, and Goldman Sachs Group Inc. showed a ratio of 5.8 percent.

“The stress tests are a tool to gauge the resiliency of the financial sector,” Fed Governor Daniel Tarullo said in a statement. “Significant increases in both the quality and quantity of bank capital during the past four years help ensure that banks can continue to lend to consumers and businesses, even in times of economic difficulty.”

The Fed on Thursday will release results of a second stress test that focuses on the lenders' capital plans, assessing how dividend or share-buyback increases would affect them. The central bank that day will inform banks whether they can increase payouts. Thursday's test results don't forecast results for next week's test, the Fed official said on the conference call, because the Dodd-Frank stress test doesn't include forward-looking management decisions.

Since the 2008-09 financial crisis, regulators have tried to minimize the odds of another taxpayer rescue, compelling banks to retain some earnings and reinforce their buffers against possible losses.

With the economy in the fourth year of expansion, banks are benefitting from a housing market rebound, falling mortgage delinquencies and record-low short-term interest rates that boost earnings.

Projected losses for the 18 banks under a scenario of deep recession and peak unemployment of 12.1 percent would total $462 billion over nine quarters, the Fed said. The aggregate Tier 1 common capital ratio would fall from an actual 11.1 percent in the third quarter of 2012 to 7.7 percent in the fourth quarter of 2014. The firms represent about 70 percent of the assets in the banking system.

The Fed said in a release that the “projections should not be interpreted as expected or likely outcomes for the bank, but rather as possible results under hypothetical, severely adverse conditions.” A Fed official said on a conference call with reporters that the severely adverse scenario represents a financial calamity of greater magnitude than any two-year period in the past 100 years except for the Great Depression.

“We are entering this year with a stronger capital base and we are further through the credit cycle,” so fewer loans are going bad, said R. Scott Siefers, a managing director at Sandler O'Neill & Partners in New York. “Even though banks are paying out more of their earnings than a couple of years ago, there has still been an increase in retained earnings,” which bolsters capital.

Bloomberg News and Trib Total Media staff writer John D. Oravecz contributed to this report.

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