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Banks Can Withstand Extreme Economic Turmoil, Fed Finds
A sharp increase in inflation. A drop in the value of the dollar. The collapse of its biggest customers.
America’s biggest banks could survive even these dire economic scenarios, according to an analysis released by the Federal Reserve on Wednesday.
The results are particularly noteworthy because, in addition to the Fed’s efforts annual bank stress testsThis year, for the first time, the sector’s top regulator subjected large lenders to a reinforced hypothetical challenge that reflected and amplified some news events – including the dissolution of an investment fund that ultimately contributed to the collapse of the Swiss banking giant Credit Suisse.
The industry has overcome the highest hurdles, with a clean bill of health as close to a clean bill of health as its leaders could have hoped for.
“The banking system is capable of withstanding funding pressure under the moderate and severe economic conditions included in the exploratory analysis,” the Fed concluded.
Some 31 banks – all with more than $100 billion in assets – also passed the more routine annual stress tests, as has become common in recent years since the metrics were implemented after the 2008 financial crisis. They measure banks’ projected performance through economic recessions, high unemployment, housing price declines and other scenarios.
The real estate sector has been a particular pressure point for banks, as many large lenders have been dumping of loans linked to office buildingsamong other areas, in an era of higher interest rates and low occupancy of commercial spaces.
Even so, the Fed found that all banks held enough capital, or the money they are required to hold, to ensure stability and provide a financial cushion against losses.
The analysis is likely to be well-received among Wall Street’s biggest banks, which have banded together to oppose an international effort to raise their capital requirements, which they say will hurt their ability to lend and, ultimately, will increase costs for consumers. The completion of this plan, known as “Basel III endgame,” has long been delayed, and Fed officials have said they hope to modify it further before it is adopted.
It took just nine minutes after the release of this year’s test for the Financial Services Forum, a banking lobby group, to release a statement saying the results demonstrated that the increase in capital requirements was not warranted because the largest U.S. lenders “ remain capable of supporting the economy in the face of a severe economic recession.”
A Fed official, speaking to reporters Wednesday afternoon on condition of anonymity, said the new results did not change Basel III plans.
Given that banks so routinely meet standards, the usefulness of stress testing itself has been questioned.
This week, the left-leaning advocacy group Better Markets, which generally favors more regulation, derided the exams as “stressless” and insufficiently challenging. Separately, Daniel K. Tarullo, a former governor of the Federal Reserve, said last month that the regulator should consider less predictable tests.