Major US banks would withstand recession: US Fed

Oscar PerryJun 23, 2017

WASHINGTON/NEW YORK The 34 largest USA banks have all cleared the first stage of an annual stress test, showing they would be able to maintain enough capital in an extreme recession to meet regulatory requirements, the Federal Reserve said on Thursday.

The first round of the central bank's annual "stress tests" showed that as a group, the 34 big banks have gained strength thanks to a steadily recovering economy. Those banks represent about 75 percent of all US assets.

Even after being pounded by a severe economic downturn, banks collectively had a 9.2% capital buffer, staying well above the Fed's minimum of 4.5%.

Banks that decide to resubmit their plans can only make downward revisions to the amount of capital they plan to use, meaning management teams that were too conservative may regret their submissions even if they pass.

"This year's results show that, even during a severe recession, our large banks would remain well capitalized", Governor Jerome H. Powell said.

The tests were mandated by Congress in the wake of the crisis that plunged the USA into the worst economic downturn since the Great Depression of the 1930s.

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Powell was one of five regulators testifying before the committee, days after the U.S. Treasury Department unveiled a plan to revamp or undo many rules enacted after the 2007-2009 financial crisis. One is whether the banks have enough capital to survive economic turmoil in the financial system. Democrats and consumer advocates largely oppose the plan, saying it would lead to more reckless behavior by the banking industry. Banks now have an opportunity to resubmit those plans if they find their own projections were much sunnier than the Fed's.

The US Federal Reserve is open to easing some banking regulations put in place after the 2008 financial crisis, including stress tests and the so-called Volcker Rule, according to a central bank governor. That was better than last year's results. The Fed said the losses would reduce the banks' high-quality capital from 12.5 percent of its loans in the fourth quarter past year to 9.2 percent at the end of 2017. Analysts had expected United States banks to make a strong showing in this year's test.

All 34 lenders subjected to the Fed stress tests exceeded the minimum projected capital and leverage ratios under the severely adverse scenario.

Banks and their investors have been hoping the improvements would prompt the Fed to allow them to use more capital for stock buybacks and dividends, especially as the Trump administration is seeking to relax financial regulations. They then ask what that would do to a bank's balance sheet.

Each year, regulators tweak the exam to keep banks on their toes. This was the first year that all the country's big banks passed since the recession.

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