Wells Fargo Exceeds Fed Minimum Capital Level Under Stress Scenario

By Emily Glazer 

Wells Fargo & Co. has the capital to keep lending in a severe economic downturn, the Federal Reserve said Thursday in the first stage of its annual stress tests.

At the low point of a hypothetical recession, Wells Fargo's Tier 1 common ratio, which measures high-quality capital as a share of risk-weighted assets, was 7.5%, above the 5% level the Fed views as a minimum allowance. Wells Fargo's Tier 1 leverage ratio, which measures high-quality capital as a share of all assets, was 6.4%, above the 4% Fed minimum.

The results will factor into the Fed's decision next week about whether to approve the bank's plan for rewarding shareholders with dividends or potential share buybacks. Banks whose capital ratios dropped close to the Fed minimum may choose to scale back their dividend or buyback plans before the Fed announces its final decision Wednesday.

The tests simulate a substantial weakening in global economic activity, huge declines in asset prices, and a large increase in financial market volatility. The Fed's "severely adverse" scenario in the U.S. results in unemployment hitting 10% in mid-2016, real gross domestic product falling about 4.5% by the end of 2015 and a 25% decline in house prices. In addition, the test's "severely adverse" scenario assumes a jump in oil prices to about $110 a barrel.

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