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Syd 04:02:24 GMT - 01/29/2013

The six largest US banks had their trading positions compared to a “global market shock” as part of the latest round of government-mandated stress tests.The tests included a doubling of German sovereign debt spreads and a 56 per cent drop in the price of benchmark oil. The US Federal Reserve’s annual exam calls for banks to test their balance sheets to ensure they would be adequately capitalised to withstand a “severely adverse” economic scenario. For Bank of America, JPMorgan Chase, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley, the stress tests included a one-off instantaneous shock to their trading positions and counterparty exposures that mimic market movements last seen during the height of the financial crisis in the second half of 2008. On Monday, the Fed made public for the first time the assumptions the six banks had to use when stress-testing their portfolios. They included a 42 per cent slide in Brazil’s main equity index and a fall in the price of triple A-rated corporate bonds from advanced economies equivalent to spreads widening by 168 basis points. Spreads on credit default swaps of double A-rated large financial groups based in core eurozone countries doubled, according to the Fed’s guidelines. Spreads on A-rated bonds of core eurozone banks tripled. The banks’ sovereign debt holdings were similarly hit, with spreads on US Treasuries widening by more than 160 per cent while spreads on UK gilts quadrupled. In all, the Fed gave the six banks some 30,000 risk factors against which to stress-test their trading portfolios. The assumptions are similar to last year’s, with slight variations in specific eurozone assets. How banks fare on the stress tests will determine how much capital they will be allowed to return to shareholders in the form of share repurchases and dividends. Bank analysts including Glenn Schorr of Nomura expect most of the 19 financial groups subject to the “comprehensive capital analysis and review” to request regulators’ permission to increase their stock buybacks and dividends. Most are expected to pass, partly because of the improving US economy and the banks’ strengthened balance sheets. Analysts at Portales Partners predicted that large regional US banks will return 62 per cent of net income to shareholders, according to a Monday note to clients. JPMorgan Chase will return 72 per cent of net income to shareholders, or a total of nearly $14bn, the analysts estimated, while Citigroup and Bank of America will return just a fraction of that.The banks submitted their data to the Fed this month. The results will be publicly announced in March. FT.