The largest banks in the United States are well capitalized and could weather a severe economic downturn, Federal Reserve officials announced on Thursday after an annual review of the big banks’ resilience. These tests were made more important by the fact that some indicators such as slowing home sales or rising interest rates seemed to raise the probability of a future recession.
Fed examined the balance sheets of the largest US banks to determine if they could withstand drastic drops in asset values. The Fed also assessed how the bank’s ability to withstand losses totalling $612 billion. This was mainly due stress in markets for corporate and commercial debt and in commercial real property prices. Each bank had enough capital to meet regulators’ minimum requirements, even in the worst-case scenario.
After the 2008 financial crisis, regulators began to perform an annual review of the industry. 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 that is commensurate with the economy’s current strength. The more robust the economy, the less stressful the stress test scenario.
Officials stress that this hypothetical Fed situation, which is used by the Fed to assess banks, does not represent a future prediction. They spoke with journalists via phone on 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 of the reserves they had set aside during the Covid-19 pandemic to prepare for sudden losses.
Due to the fact that the economy has improved, the situation for the stress tests 2022 was even worse than last year’s. Last year, all 22 of the tested banks passed. Each year, not all of the large banks are tested. Some banks have too few employees to pass the exams every year.
Days after passing last year’s tests, several of the largest institutions, including Morgan Stanley, Wells Fargo and JPMorgan Chase, increased their payouts to shareholders with the Fed’s approval.
After the market closes, the big banks will likely announce their annual payouts on Monday.
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