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Business

Big banks pass first round of Fed’s annual stress test

By
Reuters
Published June 21, 2018
Updated June 21, 2018, 6:43 p.m. ET

The 35 largest US banks have all cleared the first stage of an annual stress test, showing they would be able to maintain enough capital in an extreme recession to meet regulatory requirements, the Federal Reserve said on Thursday.

Although the banks, including household names like JPMorgan Chase, Citigroup and Bank of America, would suffer $578 billion in total losses in the Fed’s most severe scenario to date, their level of high-quality capital would be substantially higher than the threshold that regulators demand — and higher than levels seen immediately leading up to the 2007-2009 crisis, the Fed said.

“Despite a tough scenario and other factors that affected this year’s test, the capital levels of the firms after the hypothetical severe global recession are higher than the actual capital levels of large banks in the years leading up to the most recent recession,” Fed Vice Chairman Randal Quarles said in a statement.

The Fed introduced the stress tests in the wake of the financial crisis to ensure the strength of the banking industry, whose ability to lend is considered crucial to the health of the economy.

Since the first test was conducted in 2009, big banks have seen losses abate, loan portfolios improve and profits grow. The banks that now undergo the exam have also strengthened their balance sheets by adding more than $800 billion in top-notch capital, the Fed said.

Banks and their investors have been hoping the improvements would prompt the Fed to allow them to use more capital for stock buybacks and dividends, and would also boost the case for further regulatory relief promised by the Trump administration.

The Fed increases the difficulty of the test as the broader economic environment improves. This year the test features a severe global recession with the unemployment rate rising by almost 6 percentage points to 10 percent, accompanied by a steepening Treasury yield curve.

Despite putting in an overall strong performance, some banks’ results were adversely affected by the new federal tax law, which changed the impact of past losses on their hypothetical tax bills under the scenarios, senior Fed officials said.

This year is also the first in which the Fed will publicly release results of six foreign lenders, including Deutsche Bank, Credit Suisse and UBS, after requiring them to create consolidated US holding companies with ring-fenced capital.

The Fed tested those new entities last year in a trial run, the results of which are confidential.

Deutsche Bank, whose US operations have been under intense regulatory scrutiny, also easily met all the minimum capital requirements, the results showed.