What would happen if the world was thrown into a severe recession?
One of the midstate’s biggest banks would survive, according to stress-test results released this month.
Lancaster-based Fulton Financial Corp., the parent of Fulton Bank, would remain “adequately capitalized” in a worst-case scenario through all nine quarters required by the test. That means the company’s banks could stay open for more than two years in the face of some theoretical but unlikely risks, including a jump in unemployment to 10 percent, a 25 percent plunge in house prices and other extreme conditions.
Fulton officials, however, note that none of the scenarios are remotely likely. Most of the criteria required by the test’s “severely adverse” category far exceed even the conditions of the mid-2000s recession.
The big takeaway, they feel, is that even if Fulton’s banks continued operating as-is in extreme situations, they could survive.
Banking professionals caution that the public should not read much more than that into the results.
The Dodd-Frank Act stress test is a federal tool designed to ensure banks have sufficiently prepared for the possibility of a severe economic downturn.
Institutions with between $10 billion and $50 billion in assets had to publicize the results for the first time in 2015, and had to submit results of this year’s tests to the federal government by July 31 and publicize the findings between Oct. 15 and Oct. 31.
Fulton is not the only bank with a local presence expected to publish results of the test. Pittsburgh-based First National Bank, for example, also falls in the $10 billion to $50 billion range.
Banks exceeding the $50 billion mark have to go through a similar test, but the stakes are higher, with the results affecting, among other things, whether the Federal Reserve will let them increase dividends.
So why do the tests matter for smaller institutions like Fulton?
That’s a somewhat controversial topic in the banking world.
“These results don’t show much for mid-sized banks,” said Hugh Carney, vice president of capital policy at the American Bankers Association, a trade group in Washington, D.C.
Some in the industry wholly disagree with the Fed’s requirement that mid-sized banks publicize their projections. The fear is that the numbers, if interpreted incorrectly, could spread potentially damaging misinformation.
Another reason is that the factors affecting the BB&Ts and Santanders of the world may not impact smaller institutions in the same way. Carney also cautioned that the structure of the stress test, which gives banks some leeway in how they forecast worst-case scenarios, makes even bank-to-bank comparisons tricky.
For Fulton, this year’s results are a reassurance that the corporation is operating in a financially sound manner, said Patrick Barrett, Fulton Financial’s CFO and a senior executive vice president.
A better measure of the corporation’s financial health might be its earnings report, which it also released this week. Fulton reported a net income of $41.5 million, up from $34.2 million at this time last year.
“Despite a challenging interest rate and operating environment, we were able to grow revenues and reduce expenses, which enabled us to drive positive operating leverage for the quarter,” Fulton CEO E. Philip Wenger said in the earnings news release.
Fulton Financial has $18.7 billion in assets and is comprised of six banks, including Fulton Bank, which has about 60 branches in Dauphin, Cumberland, Lancaster, Lebanon and York counties, according to the FDIC. With a 16 percent market share of deposits, Fulton was the largest bank in the region as of the end of June.