Fed: Big banks survive recession stress test

NEW YORK — The largest banks in the United States are well capitalized and could weather a severe economic downturn, Federal Reserve officials said Thursday after an annual review of the big banks’ resilience. The tests took on new significance as some economic indicators, such as slowing home sales and rising interest rates, appeared to increase the likelihood of a recession in the near future.

The Fed tested the 34 largest banks operating in the United States, looking at how their balance sheets would withstand sharp drops in asset prices and a total of $612 billion in losses, caused mostly by stress in commercial real estate values and in the markets for corporate debt. Each bank had enough capital to meet regulators’ minimum requirements, even in the worst-case scenario.

The tests are part of an annual checkup regulators began performing on the financial industry after the 2008 financial crisis. Each year, the Fed uses a snapshot of the economy taken at the end of the previous year — this time it was the fourth quarter of 2021 — to design a hypothetical disaster scenario commensurate with the economy’s current strength. The better the economy in actuality, the worse the stress-test scenario.

The hypothetical situation the Fed uses to test the banks is not a prediction for the future, officials emphasized in a phone call with journalists Thursday. They added that the banks’ success in this year’s tests was particularly notable considering that many banks had gotten rid of cash, releasing some reserves they had set aside during the pandemic to prepare for sudden losses.

Francisco Covas, head of research at the Bank Policy Institute, a trade group representing many of the country’s largest banks, said in a statement that the scenario the Fed had devised for this year was worse than any recession since World War II, including the one after the 2008 financial crisis.

“Large banks continue to be in an excellent position to lend to households and businesses and support U.S. economic growth,” Covas said.