There is no question more than a few financial institutes died by the wayside after the 2008 Crash. And after the Federal Reserve issued a series of “stress tests” on the banks that did initially keep their doors open after the crash, the Fed found even more which were too shaky to safely continue.
Of the many reasons a financial institution could fail, the largest arrives from a lack of capital. This article will highlight a tale of two banks, one that survived and one that did not, after The Crash and once the Federal Reserve began to intensely look into the viability of what lending institutions remained.
A Survivor: Wells Fargo
In the instance of Wells Fargo, the key to survival has been solvency. In the fact that the San Francisco-based institution based its business model on branch-focused selling of financial products as opposed to big-market corporate ventures, allowed it to not be pulled down by those same big-market busts that affected so many other large lenders.
Wells Fargo also kept things simple and to a minimum, limiting itself to only a few other financial offshoots. For example, the company passed on Countrywide, the nation’s largest mortgage underwriter, and instead let Bank of America take the company on. The result: Bank of America had to swallow the bad home loans Countrywide previously made, not to mention the legal fees needed to rectify the situation.
Wells instead acquired Wachovia, and immediately established itself on the East Coast, by doubling its branches in addition to adding more capital to itself, capital, of course, being the true key to post-crash survival.
Of course, having a lot of products, as well as clientele, to rely on was also a major asset to those who survived 2008. In Wells Fargo’s case, its position in lending was far more diverse than other big banks as it chose to delve in not just real estate, but small businesses, car loans, energy and agriculture as well as a large army of stock brokers rivaled only by those such as B of A’s Merrill Lynch and Morgan Stanley.
But as mortgages still remain the big moneymakers for banks, Wells Fargo excelled at that as well, by quickly and succinctly correcting all issues it and Wachovia had soon after the acquisition. This, in addition to the Fed’s low interest rates, enabled Wells Fargo to have a record 14 straight quarters of successful growth.
Then there was the hands-on approach. The business of being a bank in and of itself. Customer participation increased for Wells Fargo since The Crash mostly because of customer care, encouragement to open an account and overall being a bank of integrity to many who were both heavily or minorly affected by the economic decline. People have also relied on services such as National Debt Relief during harsh economic times for support and advisement.
A Dearly Departed: Ally Financial
Of the 18 big banks the Federal Reserve put through itsstress tests, one of them failed, which was Ally Financial.
Ally, which was the former financial arm of General Motors, had nothing of the attributes that Wells Fargo relied on, most of which was capital. Ally, however, was not alone as Citigroup, SunTrust and MetLife were also shown to have failed the tests.
While Ally argued against the results, claiming the stress test was “fundamentally flawed,” the bank further stated:
“While Ally appreciates the Fed’s role in ensuring that financial institutions have adequate capital during stressed situations, using flawed assumptions could have lasting adverse impacts on the economy, including ultimately causing banks to reduce certain key lending categories.”
But the Fed’s testing differed on account of real-world scenarios as all 18 were brought under bear of severe downturns in the economy in the United States as well as Europe and Asia.
Those scenarios included a recession in which unemployment rose to 12 percent, stock values would be halved, and home prices would fall off 20 percent.
Under these tests, the Fed determined the 18 banks would suffer a combined loss of $462 billion through 2014, of which Ally would fair the weakest.
Runner-Up and Runner-Down
Those same tests produced additional results in which Citicorp was shown as to have improved the best among the big banks with 8.9 percent of its assets rising, while Bank of America rose 6.9 %. Morgan Stanley was shown as improving the least with only 6.4% and JP Morgan at 6.8%.
Dave Landry Jr. is an investor and small-business owner who blogs regularly on business, economics, and finance issues. He hopes that you enjoy this article thoroughly.