During the crisis, market assessments of the strength of financial firms focused on common equity, the most loss-absorbent form of capital. Many market participants questioned whether levels of common equity at the largest institutions would be sufficient to withstand potential losses.
In conducting stress tests under the Supervisory Capital Assessment Program in the winter and early spring of 2009, we focused predominantly on common equity ratios. It was the disclosure of these ratios, along with our insistence that firms raise additional common equity to meet these ratios, that helped reassure financial markets of the continued viability of the nation’s nineteen largest bank holding companies.