Federal Reserve: Largest US banks have enough capital to withstand economic disasters
The annual bank stress test results released by the Federal Reserve show that the largest banks in the United States have enough capital to withstand economic disasters, but also point out that risks on the banks' balance sheets are increasing. The test results indicate that even with a total assumed loss of approximately $685 billion, these large banks still meet the minimum capital requirements set by regulatory agencies. However, the Federal Reserve has warned that factors such as increasing credit card expected losses, growing risks in corporate credit card portfolios, as well as rising expenses and decreasing fee income are contributing to these risks. In addition, the test also considers scenarios such as a severe global economic recession, commercial real estate and housing price declines, and rising unemployment rates. This test result is closely watched as it depicts the performance of the largest banks in the United States during an economic downturn
According to the Wise Finance APP, the Federal Reserve stated on Wednesday that the results of its annual bank stress tests show that the largest banks in the United States have enough capital to withstand economic disasters, but also pointed out that risks on the banks' balance sheets are increasing.
This highly anticipated test puts banks through a series of theoretically severe financial system shocks, and the results show that large banks still have capital exceeding the regulatory minimum common equity requirements after withstanding assumed losses of approximately $685 billion.
Michael Barr, Vice Chairman of Supervision at the Federal Reserve, stated that although the severity of the test is similar to last year, this year's theoretical losses are higher due to "increased risks on the banks' balance sheets and higher costs." The projected losses for 2023 are $541 billion.
Barr stated in a statement on Wednesday, "While banks have the ability to withstand the specific hypothetical recession we tested, the stress tests also highlighted areas that need attention."
The Federal Reserve pointed out that an increase in credit card balances and delinquency rates led to increased expected losses on credit cards, an increase in risks in banks' corporate credit card portfolios, and a combination of increased costs and decreased fee income were factors contributing to these losses.
This year, the Federal Reserve tested the largest 31 banks in the United States, including JPMorgan Chase, Bank of America, and Wells Fargo, as well as medium-sized regional lenders like Regions Financial and Fifth Third Bancorp.
The hypothetical scenarios for this year are broadly similar to 2023, including a severe global economic recession, a 40% drop in commercial real estate prices, a 36% drop in home prices, and an increase in unemployment to 10%.
Under these hypothetical scenarios, the banks' common equity Tier 1 capital ratio would decrease from 12.7% by 2.8 percentage points to 9.9%. The Federal Reserve stated that this is a larger decline of 2.5 percentage points compared to last year, but within the same range as recent stress tests.
The annual stress test results from the Federal Reserve are closely watched by analysts and investors as they depict how the largest banks in the United States perform in a severe economic downturn, as these banks are crucial for businesses and consumers to access credit and other needs.
These tests were created after the 2008 financial crisis to help determine how much capital banks must hold to withstand economic downturns. In turn, they also indicate whether and to what extent banks can increase dividends and stock buyback plans to shareholders.
The release of these results comes at a time when U.S. financial regulators are weighing significant adjustments to the capital levels large banks must hold on their balance sheets, a move that has been widely opposed by lenders. However, industry insiders expect regulators to ultimately soften their initial proposals in a more bank-friendly manner