The 31 banks succeed in the annual exercise

Federal Reserve Vice Chairman of Oversight Michael Barr testifies before a House Financial Services Committee hearing on the response to the bank failures of Silicon Valley Bank and Signature Bank, on Capitol Hill in Washington, D.C. DC, March 29, 2023.

Kevin Lamarque | Reuters

The Federal Reserve said Wednesday that the largest banks operating in the United States would be able to withstand a severe recession scenario while maintaining their ability to lend to consumers and businesses.

Each of the 31 banks participating in this year’s regulatory exercise overcame the hurdle of being able to absorb losses while maintaining capital levels above minimum required levels, the Fed said in a statement.

The stress test assumes unemployment hits 10%, commercial real estate values ​​fall 40%, and real estate prices fall 36%.

“This year’s results show that in our stress scenario, large banks would suffer total hypothetical losses of almost $685 billion, while having capital significantly above their minimum common capital requirements,” Michael said. Barr, vice chairman of Fed supervision. “This is good news and underlines the usefulness of the additional capital that banks have built up in recent years.”

The Fed’s stress test is an annual ritual that requires banks to maintain adequate reserves for bad loans and dictates the amount of stock buybacks and dividends. This year’s version included such giants as JPMorgan Chase And Goldman Sachscredit card companies, including American Express and regional lenders such as Truist.

Although no bank appears to have been seriously disrupted by this year’s exercise, which was based on roughly the same assumptions as the 2023 test, the group’s overall capital levels fell by 2.8 percentage points. percentage, which is worse than last year’s decline.

This is because the industry holds more consumer credit card loans and more downgraded corporate bonds. Loan margins were also reduced compared to last year, according to the Fed.

“While banks are well-positioned to withstand the specific hypothetical recession we tested them against, the stress test also confirmed that there are some areas to watch,” Barr said. “The financial system and its risks are constantly changing, and we learned during the Great Recession the cost of failing to recognize evolving risks.”

The Fed also conducted what it called an “exploratory analysis” of funding stress and the trade collapse that applied only to the eight largest banks.

In this exercise, companies appear to have avoided disaster, despite a sudden increase in the cost of deposits combined with a recession. In a scenario where five large hedge funds implode, the big banks would lose between $70 billion and $85 billion.

“The results demonstrated that these banks have significant exposure to hedge funds, but can withstand different types of shocks to their trading books,” the Fed said.

Banks are expected to begin announcing their latest share buyback plans on Friday.

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