Top US banks endure annual ritual of Federal Reserve ‘stress test’

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All 31 of America’s largest banks have passed the Federal Reserve’s so-called annual stress test, satisfying regulators that they can withstand a theoretical scenario where unemployment rose to 10% during the severe recession.

The raised on Wednesday said that under its baseline scenario, banks including JPMorgan Chase, Goldman Sachs and Bank of America would lose nearly $685 billion and suffer their biggest capital loss in six years, but still meet their benchmarks. Minimum standards according to regulations.

This scenario includes a 40% decrease in commercial real estate prices, a significant increase in office vacancy, and a 36% decrease in home prices.

“This year stress test shows that large banks have enough capital to withstand a high stress scenario and meet their minimum capital ratios,” said Michael Barr, vice chairman for supervision at the Fed.

“The goal of our test is to help ensure that banks have enough capital to absorb losses in a highly stressed situation,” he added.

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

Banks, which typically use test results to update investors on potential shareholder payouts, will provide an update on Friday afternoon on what they expect in terms of new capital requirements .

Barclays research analyst Jason Goldberg estimates that the capital needs of several major banks, including Goldman and BofA, will rise more than analysts predict, potentially leaving less capital for potential dividends and stock repurchases.

Goldman shares fell 1.7 percent in after-hours trading, while BofA shares fell 0.3 percent.

Bar chart of percentage change shows some US banks set to see increased capital needs

The annual exercise began after the 2008 financial crisis and is seen as a key factor in rebuilding confidence in the economy. banking areaIn recent years, the nation’s largest banks have generally passed tests, often by wide margins, raising questions about their usefulness and purpose.

Matthew Bisanz, a partner in the financial services practice at law firm Mayer Brown, said testing reliance on capital buffers “causes people to focus on the wrong things.”

“Last March [2023]we saw three banks wiped out in one month,” he said, referring to the failures of Silicon Valley Bank, First Republic Bank and Signature Bank. “However, all 31 of these banks survived a nine-quarter stress event. This reinforces the impracticality of the stress test.”

The results come during a renewed focus on capital levels at major US banks, with regulators weighing changes to proposals to implement so-called Basel III. The final capital rule.

The Fed’s initial proposal, which called for significantly increasing capital requirements, sparked a wave of opposition. Active lobbying efforts from major US banks. Fed Chairman Jay Powell has since said they will likely make significant changes to the proposed new rules.

This year’s stress tests will push banks’ aggregate tier one capital ratio, their main cushion against losses, down 2.8 percentage points, the biggest drop since 2018.

The Fed said the larger loss was partly due to expectations of higher losses on credit card loans from the nation’s largest banks, which rose nearly 20 percent from a year ago. Banks’ corporate loan books have also become riskier, as higher costs and lower fees give lenders less cushion to absorb a severe hit.

Another scenario, which looked at what would happen if five major hedge funds went bankrupt, found that the largest and most complex banks actually had significant risks and were predicted to lose a total of between 13 billion to 22 billion USD.

Additional reporting by Stephen Gandel in New York


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