Big US banks pass Fed stress test despite uncertainty

the 23 older United States banks passed the annual stress tests of the Federal Reserve (Fed) despite the banking uncertainty that killed Silicon Valley Bank (SVB) and Signature Bank in March, the US central bank announced on Wednesday.

According to the Fed’s analyses, banks remained “above capital requirements” during a hypothetical global recession, despite losing more than US$ 500,000 million (458,227 million euros at today’s exchange rate) in the projections.

This fortressshows that big banks are well positioned to weather a severe recession and continue to lend to families and businesses”, assured the institution in a statement.

The hypothetical scenario designed by the fed this year it also included a new component called “preliminary market impact”, with less severe inflation than that registered in the baseline adverse scenario but in which inflationary pressures are higher due to population expectations.

This component has only been applied to banks that are on the list of institutions “systematically important globally” (G-SIBs), including Wells FargoBank of America and Morgan Stanley.

Although it will not change the capital requirements of the fedthe test has served to show that banks are resilient to a counterfactual environment where interest rates remain high at the same time as inflation.

In contrast, in its base adverse scenario and which all the banks analyzed have faced, unemployment grows to a maximum of 10% in the third quarter of 2024, while GDP falls by 8.75% from its current levels, which contributes to alleviating inflationary pressures.

The test also focuses on the real estate market, projecting a 40% drop in the prices of commercial real estate.

According to expert estimates, banks would lose a total of US$541 billion, of which US$100 billion would come from losses in the real estate sector.

In this scenario, the aggregate ratio of capital and common shares, which provides an extra cushion against possible losses, would fall by 2.3 percentage points to a minimum of 10.7%, above the minimum required.

Although the Fed does not directly mention the cases of the SVB and the SignatureBankthe document released today by the central bank does mention that “recent events have highlighted the need to be humble when assessing the resilience of large banks.”

The organization considers that this year’s analysis demonstrates the importance of including a wide range of risks in bank stress tests.

All US banks with more than $100 billion in assets are subject to stress testing under the Dodd-Frank Act, which underwent financial reform in 2010 following the 2007-2008 financial crisis.

Among the entities that underwent these tests are Bank of America Corporation, Barclays US LLC or Wells Fargo & Company, among others.

Source: EFE