The largest banks in the US sailed through the Federal Reserve’s annual stress tests, suggesting they would survive a sharp economic downturn.
The Fed said the results demonstrate that large banks are “well positioned to weather a severe recession and continue to lend to households and businesses even during a severe recession.”
Despite projected losses of $541bn in a severe recession, all 23 banks tested – including giants like Goldman Sachs and JP Morgan – remained above minimum capital levels.
The banks will now be allowed to return excess capital to shareholders, with payout plans likely to be announced on Friday. Analysts expect they will be lower than usual due to the volatile economic environment.
The results confirm “the banking system remains strong and resilient,” the Fed’s vice chair for supervision Michael S. Barr said.
“At the same time, this stress test is only one way to measure that strength. We should remain humble about how risks can arise and continue our work to ensure that banks are resilient to a range of economic scenarios, market shocks, and other stresses,” he continued.
The test included a 40 per cent decline in commercial real estate prices, a 38 per cent decline in house prices and an increase in unemployment to 10 per cent.
The Fed said “while large banks would experience heavy losses in the hypothetical scenario, they would still be able to continue lending”.
The $541bn in projected losses included over $100bn in losses from commercial real estate and residential mortgages. The projected loss rates on office properties were roughly triple the levels reached during the 2008 financial crisis as a result of falling office valuations.
A further $120bn came from credit card losses.
The Fed also included an “exploratory market shock” on the trading books of banks, testing them against inflation and rising rates.
Although the results will not contribute to capital requirements, the results showed that the trading books of the largest banks were resilient to rising rates.
The tests come months after the worst crisis to hit the US banking system since 2008. In a matter of weeks three banks collapsed sparking a crisis among regional lenders.
Some of the banks worst hit by the crisis, such as PacWest and Comerica, were too small to be included in the test. They will likely face stricter capital requirements under the latest round of the Basel reforms.