Top banks pass first hurdle in Fed stress tests

WASHINGTON — All of the 34 largest U.S. banks are fortified enough to withstand a severe U.S. and global recession and continue lending, the Federal Reserve said Thursday.

The first round of the central bank’s annual “stress tests” showed that as a group, the 34 big banks have gained strength thanks to a steadily recovering economy. The banks undergoing the seventh annual check-up included JPMorgan Chase & Co., Bank of America Corp., Citigroup. and Wells Fargo and Co. — the four biggest U.S. banks by assets.

The banks were tested to determine if they have large enough capital buffers to keep lending, even if hit with billions of dollars in losses brought on by a financial crisis and severe economic downturn. Capital is the cushion a bank holds against losses.

“This year’s results show that, even during a severe recession, our large banks would remain well capitalized,” Fed Gov. Jerome Powell said. “This would allow them to lend throughout the economic cycle, and support households and businesses when times are tough.”

The tests were mandated by Congress in the wake of the 2008 crisis that plunged the U.S. into the worst economic downturn since the Great Depression of the 1930s. They were designed to restore badly shaken confidence in the U.S. financial system. During the crisis, the government created a $700 billion bailout fund to stabilize hundreds of banks, large and small, across the U.S.

Nearly nine years on, banking industry profits have been steadily rising and banks have been lending more freely.

The most critical tests come next week. That’s when the Fed will announce whether it has approved banks’ requests to increase dividends or buy back shares. Those results will be based on how each bank would fare in a severe recession if it took those dividend or stock actions.

In the first round, under the tests’ hypothetical “severely adverse” scenario, the U.S. would endure a catastrophic recession in which unemployment — now at 4.3 percent — reached at least 10 percent, home prices dropped 25 percent, the stock market plunged about 40 percent and market volatility rose sharply.