The largest US banks would withstand a severe recession and still be able to lend to American households and businesses, the Federal Reserve announced Thursday.
The results of the first part of the central bank’s so-called stress tests showed 34 major lenders were on a 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 well capitalized,” Fed Gov. 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 percent, accompanied by a 35 percent 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 risk-weighted assets would drop from 12.5 percent to 9.2 percent.
The tested banks included Bank of America, JP Morgan Chase, Wells Fargo, Morgan Chase and the Deutsche Bank Trust Corp., a US unit of the troubled German financial giant.
The participating banks represent more than 75 percent 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 far-reaching changes to Dodd-Frank.
The report said some stress tests should be conducted every two years instead of annually and that they should be limited to the largest banks.
The American Bankers Association (ABA) endorsed the Trump administration’s measures and said Thursday’s findings bolstered the case for a rethink of the rules, which banks say are crimping lending.
“Today’s results reaffirm that US banks are strong and remain well positioned to continue playing their important role in accelerating economic growth,” the group said.
“From this solid foundation, the focus should now turn to what can be done to help US banks promote economic growth even further.”
Powell said this week the Fed would be open to reasonable changes to the law, including the threshold for including banks in the stress tests.

Source: Arab News