Ally Financial’s Capital Plan Rejected by Fed After Stress Tests

Ally Financial Inc., the auto lender majority-owned by the U.S., had its capital plan rejected by the Federal Reserve after regulators deemed the firm’s planning process and capital ratios didn’t meet standards.

Ally’s Tier 1 common ratio, a measure of financial strength, was 1.52 percent in a worst-case economic scenario when taking into account the company’s revised capital plan, below the Fed’s 5 percent minimum threshold, according to central bank data released yesterday in Washington. That’s lower than the Detroit-based firm’s 1.78 percent ratio after its initial submission.

The lender must submit yet another capital plan after correcting its “deficiencies,” according to the Fed, which said it objected “on quantitative and qualitative grounds.”

Ally, which received a $17.2 billion bailout that left the U.S. Treasury Department with a 74 percent stake, has repeatedly clashed with the Fed over the calculation of capital ratios. Last week, after the initial release of stress-test results, the company called the central bank’s analysis “fundamentally flawed.” Yesterday, the lender cited the strength of its capital.

“Ally continues to have strong capital levels and ample liquidity to support its automotive-finance operations,” Gina Proia, a company spokeswoman, said in an e-mailed statement. “Ally Bank continues to be a well-capitalized bank with a leading position in the market.

‘Implausible’ Assumptions

Ally’s total risk-based capital ratio, which includes common and preferred stock, was 5.96 percent under its initial plan, and 12.59 percent under the revised plan.

The lender predicted its Tier 1 common capital ratio would be 5.7 percent under the stress-test scenario last week, and said the Fed’s loss assumptions for auto loans were ‘‘implausible, even in dire economic situations,” according to a statement. Ally said the Fed could convert $5.9 billion of preferred shares owned by the U.S. government into Tier 1 common equity at its own discretion.

Yesterday, the lender took issue with the Fed’s assumptions about loss rates for dealer floorplan lending.

Regulators, intent on preventing a repeat of the 2008 financial crisis, have run annual stress tests on the largest lenders to see how they might fare in a recession or economic shock. The Fed last week disclosed how banks performed in a hypothetical recession in which U.S. unemployment peaks at 12.1 percent, home prices fall 21 percent and stocks plunge 52 percent.

Ally plans to repay its government bailout through an initial public offering. Chief Executive Officer Michael Carpenter, 65, has put the idea on hold until after the fate of its bankrupt Residential Capital mortgage business is clear.

Before it's here, it's on the Bloomberg Terminal.