The Federal Reserve Board on Thursday planned a potential rocky road for banks a year ago, but it said that 33 financial institutions it reviewed had passed the annual pressure test on capital reserves.
The Fed estimates its $ 612 billion potential loss to banks in its most severe economic scenario, and said that even if it were implemented, banks would still be healthy to lend to homes and businesses to keep the economy afloat. This is a $ 50 billion high-intensity loss projection from the big banks a year ago.
“This year’s hypothetical scenario, by design, is tougher than the 2021 test and includes a severe global recession,” the Fed said in a statement.
The Fed’s model includes a 5.75% increase in unemployment to 10%, a 40% decline in commercial real estate prices and a 55% decline in stock prices.
Under these conditions, the ratio of loss to total equity capital – the pillow against loss – falls from 2.7% to at least 9.7%, more than double the minimum required. In 2021, the projected decline in the ratio of total common equity capital was 2.4%.
After the test results, banks will be allowed to declare dividends and share buybacks from Monday after the market closes.
Federal Reserve officials stressed that the economic downturn in stress testing is not a projection of how the economy actually works, but rather a hypothesis to measure the strength of banks.
The stress test predicts more than $ 450 billion in debt losses and $ 100 billion in business and counterparty losses.
Fed officials said the banking system has limited exposure to losses in the crypto markets and is expected to recover despite the upheaval in the sector.
The banking system started the year with a total common equity capital ratio of 12.4%. It has fallen slightly in 2022 but remains above historic levels, such as 5% in 2009 and about 10% in 2012, according to Fed data.
Stress Tests JPMorgan Chase & Co. Includes the largest US banks, including JPM,
Goldman Sachs Group Inc. GS,
American Express Co. AXP,
Morgan Stanley MS,
Wells Fargo & Co. WFC,
Bank of America Corporation BAC,
And Citigroup Inc.. C,
As well as regional lenders.
Ahead of the results, Fed President Jerome Powell testified to Congress for a second day and reiterated his commitment to fight inflation, with bank stocks largely down.
JPMorgan Chase fell 1.1%, Goldman Sachs rose 0.6%, Citigroup fell 1.8% and Bank of America lost nearly 1.6%. Financial Select Sector SPDR ETFS XLF,
Stress tests measure balance sheets against capital requirements for banks as an indicator of their potential in a potential recession. The results then form how many capital banks return to shareholders in the form of repurchases and dividends.
Ahead of the stress-testing results, Cowen analyst Jarrett Seeberg said Thursday that he expected banks to pass, but he warned of a potential push by lawmakers.
“The political risk today is that the Capital Hill recession makes it possible to question why banks should diversify any capital,” Seiberg said. “We don’t see it winning the day, but it can get attention.”
Ian Katz of Capital Alpha said he expects some potential “snags” when a large number of banks are under pressure this year.
“This year’s tests are a little tougher than last year,” Katz said in a research note. “For example, the global market shock factor of the scenarios could pose challenges to banks with a lot of international exposure.”
The latest results reflect the Fed’s assessment of 33 US banks from 23 lenders last year. Banks with less than $ 250 billion in assets under the rules adopted in 2020 take the test every two years instead of every year. Large regional banks, such as Fifth Third Bancorp FITB,
And Ally Financial Inc. ALLY,
After taking 2021 added this year.
The US Federal Reserve reschedules the testing conditions each year, depending on key economic factors on the Central Bank’s radar screen.
See: Powell says the US economy can handle the additional rate hikes that are coming
Thursday’s stress test results marked the latest round of previous Dodd-Frank Bank reform legislation following the 2008 global financial crisis.
The Fed says that by 2021, the 23 largest banks operating in the US will have twice as much capital, with a loss of $ 474 billion in a potential recession. This decision led the Fed to abolish restrictions on repurchases and dividends introduced in response to the COVID-19 epidemic.
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