Don't freak out, but five years after the financial meltdown, there are still some banks that couldn't really withstand another shock.
The bad news: Some banks would barely make it. Seven institutions, including JPMorgan Chase, Bank of America and Morgan Stanley, had a little above 6 percent common equity in the Fed's apocalyptic scenario -- 11.5 percent unemployment, 50 percent drop in stock prices, $366 billion in total losses on loans, 25 percent plummet in home prices.
Again, don't freak out. The "stress test hypothesis" demanded more on the risk management front and incorporated higher capital requirements. In other words, the Fed made the test harder.
Senior officials at the central bank stressed (pun intended) that having a low equity ratio doesn't mean a bank will definitely need a bailout, the underlying fear built into these tests.
Also, the banks examined by the Fed could have a stellar plan to raise more capital to fight off the financial zombie apocalypse. And that is where part deux of this so-called stress test comes into play.
Next Wednesday, the central bank will issue its ruling on whether capital plans the 30 banks have on hand to withstand calamity would suffice. This is the sexier part of this exercise because it determines whether banks can lavish their investors with excess capital in the form of dividends.
To pass, banks must have loan books and security portfolios that could stand up under extreme economic duress (think: 2008 financial meltdown). In the face of that kind of tumult, the banks could manage operations, pay investors dividends and hold off on buying back shares.
Eight of the biggest banks also have to show they could withstand the collapse of their trading partner, a demise that could lead to massive losses.
Part deux is the equivalent of the SAT for banks, minus the number two pencils and multiple-choice answers. If they don't do well, the Fed gives them a second chance to resubmit a better capital plan.
Last year, the Fed found "weaknesses" in JPMorgan’s capital plans, which derailed the company’s plans to use its cash reserves to reward shareholders. It uncovered a similar issue at Goldman Sachs. The Fed outright rejected BB&T and Ally Financial, which at the time was largely owned by the federal government.
As a whole, banks are in better shape than they were five years ago, the Fed said.
“Each year we are making substantial improvements, which have helped make the process even stronger than when we first conducted the stress tests in the midst of the financial crisis five years ago,” said Fed Governor Daniel Tarullo, in a statement.
The big winners in Thursday's beauty contest were Wells Fargo, PNC Bank, SunTrust and American Express, with equity ratios well above 8 percent.