Federal Reserve Vice Chairman for Supervision Michael Barr testified at a House Financial Services Committee hearing on March 29, 2023 in Capitol Hill, Washington, regarding the response to the recent bank failures of Silicon Valley Bank and Signature Bank.
Kevin Lamarque | Reuters
this United States Federal Reserve The largest banks operating in the United States will be able to withstand a severe economic downturn while maintaining their ability to lend to consumers and businesses, they said on Wednesday.
The Federal Reserve said in a statement that the 31 banks participating in this year’s regulatory activities have overcome the obstacles of absorbing losses while maintaining capital levels above the minimum required.
The stress test assumes the unemployment rate surges to 10%, commercial real estate values plummet by 40%, and house prices fall by 36%.
“This year’s results show that under our stress scenario, large banks would sustain hypothetical losses of nearly $685 billion, but still have capital well above their minimum common equity requirements,” he said. Michael Barr, the Fed’s vice chairman for regulation. “This is good news and highlights the usefulness of the additional capital banks have built up in recent years.”
The Fed’s stress tests are an annual ritual that forces banks to maintain adequate buffers against bad loans and determines the size of stock buybacks and dividends. This year’s edition includes items like JPMorgan and Goldman Sachscredit card companies include American Express and regional lenders such as truthist.
Although no bank appears to have been severely hit by this year’s test, and the assumptions for this year’s test are broadly the same as those for 2023, the group’s total capital levels fell by 2.8 percentage points, a steeper decline than last year.
That’s because the industry holds more consumer credit card loans and more corporate bonds that have been downgraded. Lending margins have also been squeezed compared with last year, the Fed said.
“While banks are well-positioned to withstand the specific hypothetical recessions we tested them, the stress tests also confirmed that there are areas of concern,” Barr said. “The financial system and its risks are always changing, and we were in the midst of the Great Recession. China recognizes the cost of not recognizing risk transfer.”
The Fed also conducted what it called an “exploratory analysis” of funding stress and trading collapse, which applied only to the eight largest banks.
In this exercise, the companies appeared to avoid disaster despite a sudden spike in deposit costs and a recession. If five large hedge funds collapsed, big banks would lose $70 billion to $85 billion.
“The results suggest that these banks hold substantial exposure to hedge funds but that they are able to withstand different types of shocks to their trading accounts,” the Fed said.
Banks are expected to begin announcing their latest share buyback plans on Friday.
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