Why major US banks would withstand another recession
washington — The largest US banks would withstand a severe recession and still be able to lend to American households and businesses, the Federal Reserve announced.
The results of the first part of the central bank’s so-called stress tests showed 34 major lenders were on solid capital footing, the Fed said.
The tests are conducted under the 2010 Dodd-Frank financial reform laws, which Congress enacted in the wake of the 2008 global financial crisis — and which President Donald Trump has vowed to scale back.
“This year’s results show that, even during a severe recession, our large banks would remain wellcapitalised,” Fed Governor Jerome Powell said in a statement.
“This would allow them to lend throughout the economic cycle, and support households and businesses when times are tough.”
The results portrayed a picture of increasing resilience in the banking sector, with the 34 participating firms having added $750 billion in common equity capital since 2009. The most severe hypothetical scenario imposed by the Fed supposed a global economic downturn even worse than the recent Great Recession.
US 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. In this scenario, loan losses would amount to $383 billion over nine quarters. The ratio of capital, which allows lenders to absorb losses, to riskweighted assets would drop from 12.5 per cent to 9.2 per cent.
The tested banks included Bank of America, JPMorgan Chase, Wells Fargo, Morgan Chase and the Deutsche Bank Trust, a US unit of the troubled German financial giant. The participating banks represent more than 75 per cent of the assets of all domestic bank holding companies, according to the Fed.
In next week’s second phase of the annual stress tests, the capital strengths of the individual banks will be weighed against their capital plans — whether they would remain adequately strong after planned dividend distributions and share buybacks.
In the past, some banks have been forced to reel back those plans in order to further build capital strength.
Earlier this month, Trump’s Treasury Department released a 150-page report calling for farreaching changes to DoddFrank. —