US banks pass latest round of Fed stress tests in financial health sign

The U.S. Federal Reserve on Thursday assigned passing grades to the nation’s 33 largest banks in annual stress tests, which assess each lender’s ability to weather a severe economic downturn.

In a series of doomsday hypothetical scenarios drawn up by the Fed, banks would collectively lose $612 billion and group capital ratios would fall to 9.7%, more than double the minimum requirement, the Fed said.

The banks, which included JPMorgan Chase and Goldman Sachs as well as US subsidiaries of foreign banks such as Credit Suisse, had to show they were maintaining capital levels above government-mandated minimums after enduring the scenarios outlined by the Fed. in February.

The results confirm the financial strength of the largest US banks, some of which are classified by regulators as systemically important to the economy.

Credit Suisse’s U.S. subsidiary was the hardest hit by capital in stress tests, with its Tier 1, or CET1, capital ratio down nearly eight percentage points, followed by HSBC and Goldman.

The bulk of the hypothetical losses came from $450 billion in loan losses and $100 billion in trade and counterparty losses. Compared to last year’s stress tests, banks reported more than $50 billion in additional losses and suffered greater impacts on their capital reserves.

“This year’s hypothetical scenario is more challenging than the 2021 test, by design, and includes a severe global recession with significant stress in the commercial real estate and corporate debt markets,” the statement said. Fed in a statement, attributing banks’ resilience to “substantial” capital accumulation since the global financial crisis more than a decade ago.

Industry lobby groups were quick to praise the result. The Bank Policy Institute said the stress tests were “much harsher than any post-World War II recession”, while the Financial Services Forum said the results underscored “the strength and resilience of the largest country’s banks.

The passing grades, which analysts had expected, come amid growing fears of an impending economic slowdown. Fed Chairman Jay Powell acknowledged this week that a US recession is “definitely a possibility” as the central bank faces the fastest inflation in about 40 years.

Stress test scenarios included an almost 40% decline in commercial real estate prices, a 55% drop in equity prices, increased stress in the corporate debt market and an unemployment rate of 10 % – a much more acute crisis than economists expect. Next year.

The results of the annual test, required by the post-crisis Dodd-Frank financial regulations, will make it possible to determine the so-called stress test capital cushion for each bank. This is the amount of CET1 capital they must hold above regulatory minimums relative to their risk-weighted assets.

The stress capital buffer is a combination of the maximum CET1 capital losses during the stress test and the bank’s plans to return capital for the next 12 months to shareholders through dividends*.

Banks will be able to publicly confirm their stress capital cushion from Monday, when they can also reveal their return plans to shareholders.

Analysts expect dividends to rise this year, although they predict the pace of share buybacks at the biggest banks will slow.

The Fed has come under fire in recent years for changes to stress tests that critics say make it easier to manipulate financial institutions. Under Randal Quarles – the former Fed vice chairman in charge of oversight, who resigned in November – the tests became more transparent and the central bank was no longer able to publicly fail institutions based on qualitative assessments of their underlying soundness. Michael Barr, a former senior Treasury Department official, is awaiting Senate confirmation to fill the post vacated by Quarles.

“It is high time for the Fed to implement rigorous stress testing and strong capital requirements,” Sherrod Brown, Democratic chairman of the Senate Banking Committee, said in a statement Thursday.

“Wall Street bank CEOs have sounded the alarm about an economic hurricane, but the reality is that the biggest banks are not doing what they need to do to protect the economy from the storm. next crisis,” he added. “Instead of building capital to withstand losses or investing in the real economy and workers, they plan to spend $80 billion on stock buybacks and dividends. »

Phillip Basil, director of banking policy at advocacy group Better Markets, said the Fed’s stress tests “continue to be too stress-free” as bank performance has been boosted by deregulation under the Trump administration. .

*This story has been edited to clarify that capital return plans include dividends

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