Fed tests find big banks could survive hit
First round of checks shows institutions have strength to weather severe global recession
WASHINGTON — The Federal Reserve says that all of the 35 largest U.S. banks are fortified enough to survive an economic shock and keep on lending. Banks’ hypothetical losses from credit cards increased in the latest “stress tests,” however.
The first round of the central bank’s annual stress tests, released Thursday, shows that as a group, the 35 big banks have benefited from a steadily recovering economy to gain strength and build up capital buffers against unexpected losses. It was the eighth annual check-up for the banks, mandated by Congress after the 2008 financial crisis that triggered the Great Recession.
The Fed said it applied its toughest-ever “severely adverse” scenario for the economy in this year’s tests to see how the banks would fare. The hypothetical scenario calls for a severe global recession and a U.S. unemployment rate of 10 percent, compared with the current 3.8 percent. The stock market plunges 65 percent by early 2019 amid surging volatility under the scenario.
The banks included JPMorgan Chase & Co., Bank of America Corp., Citigroup and Wells Fargo and Co. — the four biggest U.S. banks by assets. The tested banks all have at least $50 billion in assets; together they represent about 80 percent of the assets of all banks operating in the U.S. They were tested to determine if they have sufficient capital cushions, even if hit with billions of dollars in losses brought on by a financial crisis and severe global recession.
The “severely adverse” scenario showed a total of $113 billion in projected losses from credit card loans for the banks, up from $100 billion in last year’s tests.
Overall, despite the tougher test scenario, the hypothetical capital levels of the banks “are higher than the actual capital levels of large banks in the years leading up to the most recent recession,” Fed Vice Chair Randal Quarles, who is the central bank’s supervision chief, said in a statement.
It was the third straight year that all the banks tested showed the minimum levels of capital.
The most critical tests for the industry come next week. That’s when the Fed will announce whether it has approved banks’ requests to increase dividends or buy back their shares.