The largest banks operating in the US market have sufficient resources to weather a severe economic downturn and continue to provide financing to American families and businesses, the Federal Reserve said on Thursday.
The Fed subjected 33 banks to its annual “stress test” to gauge their ability to weather a severe global recession.
In the hypothetical crisis, financial markets collapse, commercial real estate and corporate bond markets are under significant pressure, US unemployment hits 10 percent, and the economy shrinks 3.5 percent.
The results “demonstrated that banks remain well capitalized, allowing them to continue lending to households and businesses during a severe recession,” the Fed said.
The scenario for this year’s test was even grimmer than last year’s, but the outcome was the same, showing that all banks would maintain an adequate “cushion” despite projected total losses of $612 billion, according to the report.
“Despite the larger post-stress decline this year…capital ratios remain well above required minimum levels throughout the nine-quarter projection horizon,” the report said.
The stress tests, conducted after the 2008 global financial crisis, apply to banks with at least $100 billion in total assets, including the top tier, known as “global systemically important banks”.
Smaller banks are only subjected to the stress tests every two years, so the results are not directly comparable with 2021, where 23 institutions were tested.
Among the banks examined in both years, there were an additional $50 billion in losses under the harsher scenario, a Fed official told reporters.
However, the official emphasized that the disaster case used was only hypothetical and not a forecast.
With the results in hand, the banks can announce plans for dividend payments and share buybacks from Monday 2030 GMT, the official said.
The Fed ordered limits on such distributions in June 2020 as the coronavirus pandemic caused a sharp economic downturn, but eased the limits in December 2020 before lifting them after last year’s tests.
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