Invictus Stress Test Analysis Shows Leverage Ratio Trouble for 10% of Banks

Don’t be surprised if at least one Dodd-Frank bank fails the upcoming stress tests out right and a handful of others come under pressure from regulators with post-stress leverage ratios of 4 percent or less.  To produce the charts below, Invictus Consulting Group performed public data stress tests on every U.S. bank, except for the CCAR banks, whose stress tests results were released by the Fed in March. The charts show the post-stress leverage ratios of the Dodd-Frank banks (with assets of $10 billion to $50 billion) and the remaining community banks (assets below $10 billion) under a severely adverse scenario.

The average post-stress leverage ratio of the CCAR banks was 6.1 percent, declining 2.3 percent from the current average of 8.4 percent. Both the Dodd-Frank and community banks start and end with higher ratios than the CCAR Banks, but have a greater decline as a result of stress.

Under our analytical framework, more than 10 percent of the non-CCAR banks could see their leverage ratio drop below 4 percent, a level at which they would be under pressure from regulators to cut dividends, raise capital or take other measures to increase their equity cushion. Three percent of the smaller banks would have negative capital in a severely adverse scenario. Troubled and healthy banks can use stress testing to have constructive conversations with regulators about their capital requirements and strategic plans.