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All 31 of America’s largest banks have passed the Federal Reserve’s annual stress test, convincing regulators that they can withstand a theoretical scenario in which unemployment rises to 10% during a deep recession. Satisfied.
Banks including JPMorgan Chase, Goldman Sachs and Bank of America would suffer losses of nearly $685 billion under a baseline scenario, the biggest hit to capital in six years, the Federal Reserve said Wednesday. However, the company announced that it still meets the minimum regulatory standards.
This scenario included a 40 percent decline in commercial real estate prices, a significant increase in office vacancies, and a 36 percent decline in housing prices.
“This year’s stress tests show that large banks have sufficient capital to withstand highly stressful scenarios and meet minimum capital ratios,” said Michael Barr, Fed Vice Chairman for Supervision. ” he said.
“The purpose of our tests is to ensure that banks have sufficient capital to absorb losses in highly stressful scenarios.”
This test is used to calculate the minimum amount of capital that a bank must hold relative to its assets and used to absorb losses.
Banks, which often use test results to update investors on potential shareholder dividends, will provide an update on what new capital requirements are expected to be from Friday afternoon. can.
Jason Goldberg, a research analyst at Barclays, said some large banks, including Goldman and BofA, had higher capital requirements than analysts expected, with more capital available for potential dividends and share buybacks. It is estimated that there is a possibility that the number of
JPMorgan somewhat disputed the results in a statement late Wednesday, saying its own calculations showed unrealized gains on its securities portfolio were lower than the Fed expected.
Also in 2023, BofA and Citigroup disagreed with some of the initial results of the Fed’s stress tests.
Annual stress tests began after the 2008 financial crisis and were seen as a major factor in restoring confidence in the banking sector. In recent years, the nation’s largest banks have generally passed the test by wide margins, raising questions about their usefulness and purpose.
Matthew Bisants, a partner in the financial services practice at law firm Mayer Brown, said the testing’s reliance on capital buffers “causes people to focus on the wrong things.”
“In March last year (2023), three banks collapsed in one month,” he said, referring to the failures of Silicon Valley Bank, First Republic Bank, and Signature Bank. “However, all 31 of these banks survived a stress event lasting nine quarters, which confirms how unrealistic stress testing is.”
The results come as regulators consider changes to proposals to implement so-called late-stage Basel III capital requirements, putting renewed focus on capital levels at large U.S. banks.
The Fed’s initial proposal called for a significant increase in capital requirements, prompting aggressive lobbying from large U.S. banks. Fed Chairman Jay Powell later said the proposed new rules would likely make significant changes.
This year’s stress test resulted in banks’ total Tier 1 capital ratios, their main cushion against losses, falling by 2.8 percentage points, the biggest decline since 2018.
The Fed said the higher losses were in part the result of expectations that losses on credit card loans for the nation’s largest banks would rise nearly 20% from a year earlier. Banks’ corporate lending books have also become more risky, as rising expenses and lower fees leave lenders with less cushion to absorb serious hits.
In another scenario that examined what would happen if five large hedge funds failed, the largest and most complex banks had significant exposures, with total losses ranging from $13 billion to $22 billion. It has been shown that this is expected to occur.
Additional reporting by Steven Gandel in New York
