This Bank Was the Big Winner From This Year's Fed Stress Test
No bank left the Federal Reserve's annual stress testing a bigger winner than Capital One Financial (NYSE: COF). The credit card company's projected performance through the Fed's simulated nine-quarter stressed period improved markedly from 2020, which means the company will have lower capital requirements starting in October. As a result, Capital One is not only the big winner, but is going to have significant excess capital. Let me explain.
Banks are required to hold a certain amount of capital for unexpected losses. One way to see this is through a metric called the common equity tier 1 (CET1) capital ratio, a measure of a bank's core capital expressed as a percentage of risk-weighted assets such as loans. All banks must maintain a base of 4.5% and then there is a relatively new layer called the stress capital buffer (SCB).
The SCB is determined through the Federal Reserve's annual stress testing, which puts banks through a hypothetical and severely adverse economic scenario to see how their capital levels would fare. The difference between where a bank's CET1 ratio starts and the low point of the CET1 during the nine-quarter stressed period essentially determines the SCB (you also add four quarters of dividends expressed as a percentage of risk-weighted assets). During last year's stress testing, Capital One had a 5.6% SCB and an overall required CET1 ratio of 10.1%.
Source Fool.com
