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Fed stress tests show banks can withstand a severe recession

The largest banks in the United States are well capitalized and could face a severe economic downturn, Federal Reserve officials said Thursday after an annual review of the resilience of major banks. The tests took on new importance as certain economic indicators, such as slowing home sales and rising interest rates, appeared to increase the likelihood of a recession in the near future.

The Fed tested the 34 largest banks operating in the United States, examining how their balance sheets would withstand sharp asset price declines and a total of $ 612 billion in losses, caused mainly by tensions on the values ​​of commercial real estate and corporate markets. debt. Each bank had enough capital to meet regulators’ minimum requirements, even in the worst-case scenario.

The tests are part of an annual checkup that regulators began doing on the financial sector after the 2008 financial crisis. Each year, the Fed uses a snapshot of the economy taken at the end of the previous year – this time was in the fourth quarter of 2021 – to design a hypothetical disaster scenario that is commensurate with the current strength of the economy. The better the economy in reality, the worse the stress test scenario.

The hypothetical situation the Fed is using to test banks is not a prediction for the future, officials stressed in a phone call with reporters Thursday. They added that the banks’ success in this year’s tests was particularly remarkable given that many banks had dumped their cash, releasing some of the reserves they had set aside during the Covid-19 pandemic. to prepare for sudden losses.

The 2022 stress test scenario was worse than that applied to banks last year as the economy had improved in the meantime. All 22 banks tested last year also passed. Not all major banks are tested every year. Some are too small to qualify for the annual exams and are only tested every two years.

Francisco Covas, head of research at the Bank Policy Institute, a trade group representing many of the nation’s largest banks, said in a statement emailed to reporters that the scenario the Fed had designed for this year’s tests was worse than any recession since World War II, including the one that followed the 2008 financial crisis.

“Major banks continue to be in an excellent position to lend to households and businesses and support US economic growth,” Mr. Covas said.

But he warned that if regulators continued to raise capital requirements, banks’ ability to lend could be limited.

Days after passing last year’s tests, several of the biggest institutions, including Morgan Stanley, Wells Fargo and JPMorgan Chase, increased their payouts to shareholders with Fed approval.

The big banks are expected to announce their payout amounts for this year on Monday after markets close.


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