Federal Reserve Board Oversight Vice Chairman Michael Barr testifies before a House Financial Services Committee hearing on the response to the failures of Silicon Valley Bank and Signature Bank, on Capitol Hill in Washington, DC, on March 29, 2023.
Kevin Lamarque | Reuters
The Federal Reserve The largest banks operating in the United States would be able to withstand a severe recession while maintaining their ability to lend to consumers and corporations, the bank said Wednesday.
In a statement, the Fed said each of the 31 banks participating in this year’s adjustment had cleared the hurdle of being able to absorb losses while maintaining capital levels above minimum requirements.
The stress test assumes a 10% increase in unemployment, a 40% decrease in commercial real estate values, and a 36% decrease in housing prices.
“This year’s results show that under our stress scenario, large banks would incur total assumed losses of nearly $685 billion, but still have significantly more capital than their equity requirements their minimum universal ownership,” he said. Michael Barr, Fed vice chairman for supervision. “This is good news and highlights the usefulness of the additional capital that banks have built up in recent years.”
The Fed’s stress test is an annual ritual that forces banks to maintain adequate buffers against bad loans and decide on the size of share buybacks and dividends. This year’s edition includes giants like JPMorgan Chase And Goldman SachsCredit card companies included American Express and regional lenders such as Loyalist.
Although no banks were heavily affected by this year’s performance, which had almost the same assumptions as this year’s survey. 2023 testThe group’s aggregate capital level fell by 2.8 percentage points, worse than last year’s decline.
That’s because the industry is holding more consumer credit card loans and more downgraded corporate bonds. According to the Fed, lending margins have also narrowed compared to last year.
“While banks are well positioned to withstand the specific hypothetical recession we tested, the stress test also confirms that there are several areas to watch,” Barr said. ”. “The financial system and its risks are always evolving, and we learned from the Great Recession the cost of not acknowledging changing risks.”
The Fed also conducted what it called an “exploratory analysis” of funding strains and trading crises that applied only to the eight largest banks.
In this run, companies appear to have avoided disaster, despite the sudden rise in deposit costs associated with the economic downturn. In the scenario where 5 large hedge funds explode, big banks will lose between 70 billion and 85 billion USD.
“The results demonstrate that these banks have significant exposure to hedge funds but that they can withstand different types of book-of-business shocks,” the Fed said.
Banks are expected to start announcing their latest share buyback plans on Friday.
