One in eight financial institutions did not pass a proprietary capital adequacy stress test created by New York-based Trepp LLC.
The Trepp Capital Adequacy Stress Test (T-CAST) model and current regulatory proposals were applied to more than 6,000 banks. Using third quarter 2012 data, 747 institutions did not pass the T-CAST examination. However, the percentage of banks that failed the T-CAST under a severely adverse economic scenario shrank by seven-tenths of a percentage point to 12%, a slight improvement from the 12.7% level registered in the second quarter of last year.
The test results revealed that while banks with over $10 billion in assets were the only category to experience a net gain of banks that failed T-CAST, this segment continued to outperform others. In this category, six of the 81 banks (7.4%) failed the test. Smaller banks' capital ratios eroded and, while there was some improvement in the number of banks that passed in the third quarter, a significant percentage (12.3%) of banks with under $1 billion in assets failed.
On a state level, results were varied. Thirty-two states experienced a change of more than 1% in their T-CAST fail rate from second-quarter 2012 results. Twenty of those states experienced a decline, while 12 saw an increase. States that cause the greatest concern are those with the highest rate of bank closures, although conditions have improved since last quarter.
‘While conditions in these states have improved, the high T-CAST failure rates indicate that more progress in capital raising and balance sheet healing is needed before these areas fully emerge from the recent failure cycle,’ says Trepp's Managing Director Matt Anderson.
A full report on the new T-CAST examination is now online.