Major US banks would withstand recession: US Fed

Morgan Stanley Barclays Goldman Sachs JPMorgan Credit Suisse Citigroup and Bank of A
Morgan Stanley Barclays Goldman Sachs JPMorgan Credit Suisse Citigroup and Bank of A

24 June, 2017

Overall, officials found that in the most severe scenario, companies would have suffered about $383 billion in losses on loans.

"This year's results show that, even during a severe recession, our large banks would remain well capitalized", Fed Governor Jerome Powell said in a statement.

Bank executives have complained that regulators have unduly required banks to pile on capital that they could use to lend to small businesses and homeowners.

The results portrayed a picture of increasing resilience in the banking sector, with the 34 participating firms having added $750 billion in common equity capital since 2009. That is likely to increase calls from the financial industry and its allies in the Trump administration and Congress to start watering down the regulations.

One was similar to the 2008 financial crisis. Stress tests are simulations regulators run to gauge a bank's ability to weather a downturn.

Powell this week said the Fed would be open to reasonable changes to the law, including the threshold for including banks in the stress tests.

In a statement, Rob Nicholas, President of the American Bankers Association, said, "Today's results reaffirm that US banks are strong and remain well positioned to continue playing their important role in accelerating economic growth".

Thursday's results are the first of a two-part exam. All banks eclipsed the Fed's mandated 3 percent level, but several of them cut it close.

The second portion of the test, to be released on Wednesday, will show whether the Fed approves or denies banks' capital plans. For example, Wells Fargo, a major lender to companies and for commercial real estate, estimated it would lose nearly $20 billion less than the $50.4 billion the Fed projected. The central bank tests the wherewithal of banks to withstand unemployment spiking to 10 percent, home prices falling more than 20 percent, commercial real estate dropping more than 30 percent and the Dow Jones Industrial Average plummeting 42 percent.

Even with billions of losses, the banks' amount of high-quality capital would cover 9.2% of their risk-weighted assets, an improvement over last year's 8.4%. The Fed said the losses would reduce the banks' high-quality capital from 12.5 percent of its loans in the fourth quarter past year to 9.2 percent at the end of 2017.

Analysts say Citigroup Inc has the most to gain or lose in the stress tests. It was the third straight year that the Fed rejected the plan of the US division of Santander, which is one of Europe's biggest banks, and the second straight rejection for Deutsche Bank Trust Corp., the USA transaction bank and wealth management business of Germany's largest bank.

In last year's second round, the Fed barred US businesses of two European banks, Germany's Deutsche Bank and Spain's Santander, from raising dividends or boosting stock buybacks.

Of those, Goldman Sachs had the biggest optimism gap compared with the Fed when it came to the worst-case scenario. Wells Fargo's metric also fared better in its own test than under the Fed's, by 0.8 of a point.

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