Fed Acknowledges Error Grading Bank Stress Test

Peter Eavis
The New York Times
The Federal Reserve made an error in its stress test of Citigroup that led it to overstate a key measurement of losses on the bank’s mortgages, the central bank acknowledged on Friday.

The Fed also issued corrections for Bank of America, Ally Financial, MetLife and Wells Fargo. It said the corrections don’t change the capital ratios projected by the stress tests, which estimated the losses that a bank can bear amid scenarios that include a severe recession and a market meltdown. The tests, first published on Tuesday, calculated how much of a hit would occur to a bank’s capital assuming losses on a range of loans and securities over a 27-month period that concludes at the end of 2013…

…In the original test results, the Fed projected losses on Citigroup’s first-lien home loans that would be equivalent to 9.7 percent of its total mortgages. But the Fed now says that the loss rate is 9.3 percent. The change occurred after the Fed moved projected losses on Citigroup’s foreign mortgages to another category. As a result, the 9.3 percent loss rate is just for mortgages in the United States.

The change seems small but it signals that the Fed failed to include nearly $40 billion of foreign mortgages in its original loss-rate calculation for Citigroup’s mortgage…

The entire article is at The New York Times.

H/T [headline and photo] Business Insider

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