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Zions Bank fails to pass Federal stress test

By Jasen Lee | Posted - Mar 21st, 2014 @ 8:11pm

SALT LAKE CITY — One of Utah's largest banking institutions is the only large bank in the nation that did not meet the minimum standards for financial capital levels set by the Federal Reserve in the event of a major economic meltdown.

Zions Bancorp was the only bank of 30 tier-1 large institutions reviewed that did not meet the Dodd-Frank Wall Street Reform and Consumer Protection Act stress test lowest guidelines.

The Federal Reserve announced the results of the bank stress tests on Thursday in an effort to determine whether the largest banking institutions in the U.S. were collectively better positioned to continue to lend to households and businesses and to meet their financial commitments in a catastrophic economic downturn than they were five years ago.

Despite the less-than-flattering outcome for Zions Bancorp, Bob Allen, professor of accounting in the David Eccles School of Business at the University of Utah, said the results should not be taken as an indictment of the institution.

“Zions isn’t the first bank to ever not pass a stress test,” he said. “There are other well-respected that have fallen below (the minimum) level in other stress tests.”

But Allen acknowledged the importance of such exams in helping regulators and bank managers monitor the health of the institutions.

“We do need to be prepared for scenarios that are somewhat unexpected,” Allen said, adding that such preparation will help prevent more economic turmoil in the event of a downturn.

Allen said Zions Bank customers should not feel concerned about the safety of their accounts at the institution, despite the results.

“It’s a solid bank,” he said. “They have a long-standing record of terrific bank management.“

Allen lauded the usefulness of such stress tests in helping to ensure the stability of the nation’s financial institutions, particularly in the wake of the Great Recession.

While Zions Bancorp yielded a less-than-favorable outcome in the stress comparability review, the company has been able to address the perceived deficiencies over the past several months and upgrade its standing, said Harris Simons, Zions Bancorp chairman, president and CEO.

“Our risk profile has improved,” he told the Deseret News Friday.

Zions, based in Salt Lake City, slid to a loss in the fourth quarter as it booked hefty charges related to losses on investment securities and other one-time items.

Zions said in a statement that its performance on the stress tests was worse than it expected mostly due to significantly higher commercial real estate losses, significantly greater risk-weighted assets and lower pre-tax, pre-provision net revenue.

Zions has recently submitted updated information that Simmons said should show that the company has made necessary adjustments to put it in a better capital position in a similar stress test scenario.

Meanwhile, the overall results of the test indicated continued comprehensive improvement in the institution’s capital positions since the recent financial crisis, the Federal Reserve stated.

The test reflected “the severity of the most extreme economic stress scenario,” featuring a deep recession with a sharp rise in unemployment, a nearly 50 percent drop in stock prices and a decline in housing prices to levels last seen in 2001. The projected loan losses at the 30 bank holding companies would total $366 billion during the nine quarters of the hypothetical stress scenario, the report said.

The aggregate tier 1 common capital ratio — comparing high-quality capital to risk-weighted assets — would fall from an actual 11.5 percent in the third quarter of 2013 to the minimum level of 7.6 percent in the hypothetical stress scenario, the report states. That minimum post-stress number would be significantly higher than the 30 banks' actual common ratio of 5.5 percent measured at the start of 2009.

Capital is important to banking organizations, the financial system and the overall economy because it behaves as a cushion to absorb losses and ensures that losses are borne by shareholders, not taxpayers, the Federal Reserve stated.

The Federal Reserve's stress scenario — which used information submitted to the institutions last September — estimated the outcome of deliberately stringent and conservative assessments under hypothetical economic and financial market conditions and the results are not forecasts or expected outcomes, the report explained.

The Fed is expected to release the Comprehensive Capital Analysis and Review on March 26. CCAR is an annual exercise that evaluates the capital planning processes and capital adequacy at the nation’s largest financial institutions.

Those results are considered to be a more accurate depiction of an institution’s financial health than the most recent less-stringent stress test scenario.

Contributing: Associated Press

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