The Federal Reserve on Wednesday stress tested banks and made its announcement
The Federal Reserve has tested the banks' ability to weather the housing market crash, high unemployment and trade turmoil.
The Federal Reserve said on Wednesday that the largest US banks are well capitalized and ready to withstand major shocks in economic and financial markets after subjecting them to a series of hypothetical catastrophe scenarios.
Annual stress testing of banks, which the regulator began conducting after the financial crisis in 2008, showed that they can easily withstand a 40% drop in commercial real estate prices and cumulative losses of more than half a trillion dollars.
The scenarios faced by the 23 largest banks also included a severe economic recession, 10 percent unemployment and a significant drop in home prices.
The goal of regulators was to determine whether banks had enough cash or equivalent to cover sudden, unforeseen losses. Once banks know whether regulators consider them sufficiently capitalized, they can decide how much money to return to shareholders through buybacks and dividends.
Senior Fed officials said Wednesday they do not expect banks to announce any plans to distribute cash to shareholders before Friday.
One novelty this year: Regulators have examined whether the eight banks most heavily involved in trading equities, bonds and other financial products can weather a sudden panic in those markets, and have hinted that future stress tests could include similar scenarios, even if they do not contribute specifically to banks' capital requirements.
"Today's results confirm that the banking system remains strong and resilient," said Michael S. Barr, Fed vice chairman for supervision. “At the same time, this stress test is just one way to measure that strength. We must remain humble about how risks may arise and continue our work to ensure that banks are resilient to a range of economic scenarios, market shocks and other stresses.”
The tests provided another report on the state of the banking industry in the wake of the crisis this spring, when four lenders collapsed, including the Bank of Silicon Valley, casting doubt on the Fed's ability to control them. While Wednesday's results appear to confirm what regulators have recently told Congress that the banking system is safe and sound, they are unlikely to help decide whether the Fed's regulatory methods are strong enough.
The process of testing banks for this year's results began long before the banking crisis in the spring, and the scenarios against which each bank was tested were designed before the failures, so they did not represent any reaction to the crisis, Fed officials said. said. But they identified some of the same factors that have brought down regional banks like First Republic Bank, including rising interest rates and falling commercial property values.