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Largest Banks Could Weather ‘Severe Recession’, Stress Tests Show

Biggest banks appear well-placed to navigate severe downturn, Fed finds

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  • Written by  Banking Exchange staff
Largest Banks Could Weather ‘Severe Recession’, Stress Tests Show

America’s largest banks are well positioned to weather a severe recession and maintain lending amid a downturn, according to the Federal Reserve’s latest stress tests.

The Fed’s results show that the banking system remains “strong and resilient”, said Michael Barr, the vice chair for supervision.

However, he conceded that the stress tests, which assess metrics such as banks’ minimum capital requirements during a hypothetical recession, were “only one way to measure that strength”.

“We should remain humble about how risks can arise and continue to work to ensure that banks are resilient to a range of economic scenarios, market shocks, and other stresses,” Barr added.

All 23 banks tested remained above their minimum capital requirements during the test, despite total projected losses of $541 billion, with the aggregate common equity risk-based capital ratio — which provides a cushion against losses — projected to decline by 2.3 percentage points to a minimum of 10.1 percent.

The stress test included a 40 percent decline in commercial real estate prices, a substantial increase in office vacancies, and a 38 percent decline in house prices, accompanied by a peak of 10 percent unemployment and commensurate economic decline.

The positive scorecard was welcomed by the American Bankers Association (ABA).

“The Federal Reserve’s latest stress test results confirm what top regulators have repeatedly stated — America’s banks remain strong, and the tested institutions have built up significant capital reserves that will allow them to continue lending and supporting our economy even under the most severe economic conditions,” said Rob Nichols, ABA president and CEO.

He added that policymakers should keep the results “front and center” before considering new Basel capital requirements that he claimed would “only make it harder for banks of all sizes to meet the needs of their customers, clients and communities”.

Nichols’ comments come just days after his organization pushed back against a speech by Martin Gruenberg, chair of the Federal Deposit Insurance Corporation (FDIC), who suggested his body — along with the Federal Reserve and the Office of the Comptroller of the Currency — was considering extending the minimum capital buffers that currently apply to banks with more than $250 billion in assets to include those with more than $100 billion.

Nichols said he had been “disappointed” by the remarks, adding that additional capital requirements for mid-sized and regional banks would make it “particularly difficult… to provide credit to consumers and businesses during times of economic stress”.

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