Ally says Federal Reserve's stress test was 'fundamentally flawed'

NEW YORK -- Ally Financial Inc., the auto lender majority-owned by the U.S., disputed results of the Federal Reserve's stress tests, calling the analysis "fundamentally flawed."

"The analysis is inconsistent with historical experience in the most-stressed periods in our business," Ally, the one-time GMAC unit of General Motors, said in a statement on Thursday.

Loss assumptions for automotive finance are "implausible, even in dire economic situations," and Ally has strong capital levels and ample liquidity to support vehicle financing, the company said. The Fed could convert $5.9 billion into Tier 1 common equity at its own discretion, according the statement.

The biggest U.S. banks have enough capital to withstand a severe economic downturn, the Federal Reserve said on Thursday, with all but one passing the annual health check of the financial sector.

Banks' efforts to boost their capital since the 2007-2009 U.S. financial crisis helped all 18 participating lenders except Ally Financial meet the minimum hurdle of a 5 percent capital buffer in the Fed's "stress test."

In case of recession

The tests give regulators a view into how the banking sector would respond to a severe recession. The firms in the test represent more than 70 percent of total bank holding company assets in the United States, a senior Fed official said.

"The nation's largest bank holding companies ... are collectively in a much stronger capital position than before the financial crisis," the Fed said in a statement.

At 1.5 percent, Ally Financial was the only bank to miss the 5 percent target. The Fed's results included the assumption that Ally still bears liabilities from its mortgage unit, which filed for bankruptcy in May.

Firms that come in below the 5 percent minimum are not necessarily in danger of collapsing but must work with the Fed on a plan to bring capital back up to the standard, senior Fed officials said.

Ally benefited from more than $17 billion in U.S. bailouts during the financial crisis and plans to repay the funds by staging an initial public offering. CEO Michael Carpenter has put the idea on hold until after the fate of its bankrupt Residential Capital mortgage business is clear. The U.S. owns 74 percent of Ally.

Bloomberg and Reuters contributed to this report.

DETROIT – Ally Financial believes that the Federal Reserve's analysis of Ally's capital adequacy for the Dodd-Frank Act Stress Test (DFAST) is fundamentally flawed and, while the Fed has not provided details, the analysis is inconsistent with historical experience in the most stressed periods in our business.

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. For example, Ally believes the loss rates assumed for the automotive finance business are implausible, even in dire economic situations. The auto finance sector, in fact, has historically been one of the best performing asset classes during economic downturns.

Regardless of the DFAST results, Ally continues to have strong capital levels and ample liquidity to support its automotive finance operations. In addition, Ally Bank continues to be a well-capitalized bank with a leading position in the market.

Moreover, if the Fed has significant concerns about Ally's capital adequacy, it can immediately initiate a conversion of approximately $5.9 billion of existing capital that can be fully converted into Tier 1 common equity at their discretion. If the Fed had converted this capital, Ally's Tier 1 common ratio would have been 7.6%, which would have been materially in line with the industry average for the 18 banks in the DFAST analysis.