Fed: Biggest US banks strong enough to withstand recession

Posted June 23, 2017

The banks, with at least $50 billion in total assets, represent more than 75 percent of domestic banking assets.

Other banks serving the Triad required to conduct the stress test are Bank of America Corp., Fifth Third Bancorp, PNC Financial Services Group Inc., SunTrust Banks Inc. and Wells Fargo & Co.

The Fed introduced stress tests after the 2008 financial crisis rocked markets around the globe in order to examine whether the country's biggest banks could handle a severe recession.

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"The nation's largest bank holding companies have strong capital levels and retain their ability to lend to households and businesses during a severe recession", said the Fed in a statement on Thursday. The reviews have encouraged the 34 banks to add more than US$750 billion (S$1.04 trillion) in common equity capital since 2009, with a focus on safe and less profitable businesses.

The 34 largest banks in the United States have money on hand to withstand a severe recession, the USA central bank said on Thursday. Before Thursday's results, analysts predicted banks would be able to return more than US$120 billion to shareholders over the next four quarters, or about 85 percent of their profit. Bank of America's calculation was US$12.1 billion less than the Fed's US$45 billion.

U.S. unemployment would rise to 10 per cent, accompanied by a 35 per cent drop in commercial real estate prices and pressures on corporate loan markets as well. That measure, called the tier-one capital ratio, was exceeded by all 34 banks.

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The second phase is an annual Fed exercise that evaluates the banks' capital planning processes and capital adequacy.

The 34 banks tested would have losses of $383 billion under what the Fed calls a "severely adverse" scenario: a 10% unemployment rate, stressed loan markets, and a drop of 35% in the commercial real estate market.

However, even with the losses in that scenario, the banks' aggregate level of high-quality capital would still cover 9.2 percent of their risk-weighted assets, according to the Fed. The Fed says it was the first time that the tests showed credit card lending as the biggest loss category. They then ask what that would do to a bank's balance sheet. 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.

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