News
Big banks pass Fed stress test as they battle tighter capital rules
The 31 large U.S. banks that participated in a Federal Reserve stress test would all be able to withstand a severe global recession, a new show of strength as they back away from tighter regulations that would force them to hold more capital.
The results released by the Fed on Wednesday show that these banks would have enough capital available to absorb losses and continue lending during a two-year scenario in which US unemployment rises to 10%, commercial real estate prices fall 40% and the stock market plummets 55%. %.
Their losses in this simulation collectively amounted to $685 billion. This included $175 billion in credit cards, $142 billion in business loans and nearly $80 billion in commercial real estate.
The largest of the group – JPMorgan Chase (JPM), Bank of America (TAS), Wells Fargo (Wordfast), Citigroup (W), Goldman Sachs (GS) and Morgan Stanley (IN) — all would have capital reserves close to double the Fed’s 4.5% minimum requirement in this extreme scenario.
Large regional banks such as PNC (PNC) and Truist (TFC), Regions (RF), Citizens (CFG) and Banco M&T (MTB) also had relatively higher levels of capital than the minimum.
One regional bank that has struggled this year, New York Community Bancorp (NYCB), was not part of the most recent test. Instead, it will be examined in 2025.
“The goal of our test is to help ensure that banks have enough capital to absorb losses in a highly stressful scenario,” Fed Vice Chairman of Supervision Michael Barr said in a statement. “This test shows yes.”
Federal Reserve Vice Chairman for Supervision Michael Barr. (REUTERS/Evelyn Hockstein) (REUTERS/Reuters)
But there were signs of some new weaknesses, despite the passing grade given to all banks.
The aggregate decline in banks’ capital ratios during a hypothetical recession was greater than the decline recorded by banks in last year’s test, when fewer creditors were examined.
“The test resulted in higher losses because banks’ balance sheets are a little riskier and their expenses are higher,” Barr added.
He cited three main factors driving the capital decline: “substantial” increases in bank credit card balances, riskier corporate credit portfolios and fewer projected revenues due to higher expenses and lower rate income.
The results varied widely between banks. The bank with the highest rate of loan losses in the Fed’s “severely adverse scenario” was Discover (DFS), followed by Capital One (COF).
Capital One agreed earlier this year to buy Discover in a deal that still needs regulatory approval to close.
The bank with the lowest loan loss rate was Charles Schwab (SCHW).
Capital One headquarters in McLean, Virginia. (REUTERS/Kevin Lamarque) (REUTERS/Reuters)
The Fed began stress testing a wide range of banks in the aftermath of the last financial crisis. It was required annually by law for institutions with more than $100 billion in assets, as part of legislation passed in 2010.
The story continues
A law passed in 2018 adapted the tests according to the size of the banks, meaning that those between $100 billion and $250 billion would be tested every two years.
Some Democrats and regulators last year criticized the 2018 adjustment. They argued it could have helped prevent problems that had accumulated at Silicon Valley Bank, which had not been subjected to a stress test before failing in 2023.
Banks typically use the results of the Fed’s annual stress tests to determine how much they should have on their balance sheets to absorb shocks and how much they have left over for dividends and buybacks.
Some banks are expected to make announcements on Friday about how much money they plan to return to shareholders.
Any measures are “likely to be modest for many” until lenders get more clarity from regulators on a new set of capital requirements proposed last year, said Gerard Cassidy, an analyst at RBC Capital Markets.
The initial version called for increasing capital levels by an aggregate total of 16%, and banks have spent the last year aggressively pushing back on the plan.
Regulators have signaled changes are coming, with Barr saying in May that he expects “broad and material changes” to the proposal.
Bloomberg reported this week that a new proposal could reduce capital increases to as little as 5%.
Click here for in-depth analysis of the latest stock market news and events that move stock prices.
Read the latest financial and business news from Yahoo Finance