Business

Big U.S. Banks Resist Federal Reserve’s Annual “Stress Test” Ritual

Unlock Editor’s Digest for free

The 31 largest U.S. banks all passed the Federal Reserve’s annual stress tests, demonstrating to regulators that they could withstand a theoretical scenario in which unemployment hits 10 percent in a severe recession.

The Fed said Wednesday that under its base case scenario, banks like JPMorgan Chase, Goldman Sachs and Bank of America would lose nearly $685 billion and suffer their biggest capital hit in six years, but would still meet minimum regulatory standards.

The scenario involved a 40 percent drop in commercial real estate prices, a substantial increase in office vacancies and a 36 percent drop in real estate prices.

“This year’s stress test shows that large banks have enough capital to withstand a very stressful scenario and meet their minimum capital ratios,” said Michael Barr, Fed vice chair for policy. supervision.

“The aim of our test is to help ensure that banks have sufficient capital to absorb losses in a very stressful scenario,” he added.

The tests are used to calculate the minimum amount of capital, used to absorb losses, that banks must hold relative to their assets.

Banks, which often use the test results to inform investors about potential payouts to shareholders, will provide an update Friday afternoon on what they expect from their new capital requirement.

Jason Goldberg, an analyst at Barclays, said several big banks, including Goldman and BofA, were expected to see their capital requirements rise more than analysts had expected, which could leave less capital for possible dividends and buybacks.

Shares of Goldman were down 1.7 percent in after-hours trading, while those of BofA fell 0.3 percent.

Big U.S. Banks Resist Federal Reserve’s Annual “Stress Test” Ritual

This annual exercise began after the 2008 financial crisis and was seen as a major factor in restoring confidence in the banking sector. In recent years, the nation’s largest banks have generally passed the tests, usually by a wide margin, raising questions about their usefulness and purpose.

Matthew Bisanz, a partner at law firm Mayer Brown, said the use of capital reserve testing “focuses people on the wrong things.”

“Last March (2023), we saw three banks disappear in one month,” he said, referring to the failures of Silicon Valley Bank, First Republic Bank and Signature Bank. “Yet these 31 banks all survive a nine-quarter stress event. This reinforces the unrealism of the stress test.

The findings come amid renewed focus on the capital levels of major U.S. banks, as regulators consider changes to their proposal to implement the so-called Basel III Endgame capital rules.

The Fed’s initial proposal, which called for a significant increase in capital requirements, prompted an aggressive lobbying effort from major U.S. banks. Fed Chairman Jay Powell has since said he will likely make substantial changes to the proposed new rules.

This year’s stress tests would lead to a 2.8 percentage point drop in banks’ overall Tier 1 capital ratio, their main buffer against losses, the biggest decline since 2018.

The Fed said the larger losses were partly the result of a forecast of higher losses on credit card loans for the nation’s largest banks, up nearly 20 percent from the previous year. last year. Banks’ business loan portfolios have also become riskier, as rising expenses and falling fees have left lenders with less cushion to absorb a hit.

Another scenario, looking at what would happen if five large hedge funds failed, showed that the largest and most complex banks were indeed exposed and expected to lose between $13 billion and $22 billion in total.

Additional reporting by Stephen Gandel in New York

News Source : www.ft.com
Gn bussni

Back to top button