Federal Reserve Board Vice Chairman for Supervision Michael Barr testifies before a House Financial Services Committee hearing on the response to the Silicon Valley Bank and Signature Bank bank failures on Capitol Hill in Washington, DC, March 29, 2023.
Kevin Lamarque | Reuters
The Federal Reserve said Wednesday that the largest banks operating in the U.S. would be able to withstand a severe recession scenario while maintaining their ability to lend to consumers and businesses.
Each of the 31 banks in this year’s regulatory action cleared the hurdle of being able to absorb losses while maintaining more than minimum capital requirements, the Fed said in a statement.
The stress test assumed unemployment would rise to 10%, commercial property values would fall by 40% and property prices would fall by 36%.
“This year’s results show that in our stress scenario, large banks would suffer hypothetical total losses of nearly $685 billion, but would still have significantly more capital than their minimum common capital requirements,” said Michael Barr, vice chairman for supervision Fed. “This is good news and underlines the benefit of the additional capital that banks have built up in recent years.”
The Fed’s stress test is an annual ritual that forces banks to maintain adequate cushions for bad loans and sets the level of stock buybacks and dividends. This year’s version featured giants like JPMorgan Chase And Goldman SachsCredit card companies including American Express and regional lenders such as Truist.
While this year’s exercise, which used roughly the same assumptions as the 2023 test, does not appear to have seriously cornered any bank, the group’s total capital position fell by 2.8 percentage points, worse than last year’s decline.
That’s because the industry holds more consumer credit card loans and more corporate bonds that have been downgraded. Lending margins also fell compared to last year, the Fed said.
“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 evolving, and we learned in the Great Recession the costs of failing to acknowledge shifting risks.”
The Fed also conducted what it called an “exploratory analysis” of funding shortages and a trade crisis that affected only the eight largest banks.
Despite a sudden increase in deposit costs coupled with a recession, companies appeared to be able to avoid disaster. In a scenario where five major hedge funds implode, the major banks would lose between $70 billion and $85 billion.
“The results showed that these banks have significant exposure to hedge funds, but that they can withstand various types of trading book shocks,” the Fed said.
Banks are expected to begin announcing their latest share buyback plans on Friday.
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2024-06-26 21:26:37
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