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Fed says U.S. banks can weather severe downturn comfortably

Stock Markets Jun 23, 2022 09:24PM ET
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© Reuters. The exterior of the Marriner S. Eccles Federal Reserve Board Building is seen in Washington, D.C., U.S., June 14, 2022. REUTERS/Sarah Silbiger

By Pete Schroeder and Michelle Price

WASHINGTON (Reuters) -The largest U.S. banks on Thursday easily cleared the Federal Reserve's annual health check, in a vote of confidence for the sector amid signs the U.S. economy could tip into a recession in the months ahead.

The results of the Fed's annual "stress test" exercise showed the banks have enough capital to to weather a severe economic downturn and paves the way for them to issue share buybacks and pay dividends.

The 34 lenders with more than $100 billion in assets that the Fed oversees would suffer a combined $612 billion in losses under a hypothetical severe downturn, the central bank said.

But that would still leave them with roughly twice the amount of capital required under its rules.

As a result, banks including JPMorgan Chase (NYSE:JPM), Bank of America (NYSE:BAC), Wells Fargo (NYSE:WFC), Citigroup (NYSE:C), Morgan Stanley (NYSE:MS) and Goldman Sachs (NYSE:GS) can use their excess capital to issue dividends and buybacks to shareholders. Those plans can be announced after the close of trading on Monday.

"We view this as about as positive for the big banks as one could expect from the annual stress test," Jaret Seiberg, an analyst with Cowen Washington Research Group, said in a research note. "Banks didn't just perform well. The test showed they could weather a severe downturn with plunging commercial real estate and equity values and surging unemployment levels."

The country's largest banking group hailed the results as a sign of the sector's strong financial health. But Sherrod Brown, the Democratic chair of the U.S. Senate Banking Committee, criticized the exercise as not rigorous enough.

Under the annual stress test exercise established following the 2007-2009 financial crisis, the Fed assesses how banks' balance sheets would fare against a hypothetical severe economic downturn. The results dictate how much capital banks need to be healthy and how much they can return to shareholders.

While the 2022 scenarios were devised before Russia’s invasion of Ukraine and the current hyper-inflationary outlook, they should give investors and policymakers comfort that the country's banks are well-prepared for what economists warn is a potential U.S. recession later this year or next.

The 34 banks suffered heavy losses in this year's scenario, which saw the economy contract 3.5%, driven in part by a slump in commercial real estate asset values, and the jobless rate jumping to 10%. But even then, the Fed said aggregate bank capital ratios were still roughly twice the minimum amount required by regulators.

STRONG SHOWING

In 2020 the Fed scrapped the "pass-fail" test model and introduced a more nuanced, bank-specific capital regime.

The test assesses whether banks would stay above the required minimum 4.5% capital ratio - a measure of the cushion banks have to absorb potential losses. Banks that perform well typically stay well above that.

The average capital ratio for the 34 banks was 9.7%, the Fed said. That compares with 10.6% last year, when the Fed tested 23 lenders against a slightly easier scenario.

The average ratio for the country's eight "globally systemically important banks," or GSIBs, under the test was 9.64%, according to a Reuters analysis of the results.

Shares in Bank of America, which had the lowest ratio of the GSIBs at 7.6%, slipped in after hours trading, as did shares in Citigroup, whose ratio stood at 8.6.%. Shares in State Street (NYSE:STT), whose ratio came in at 13.2%, jumped slightly.

Foreign banks U.S. units aced the test, with the average capital ratio for the seven tested coming in at 15.2%.

Overall, regional lender Huntington Bancshares Incorporated (NASDAQ:HBAN) had the lowest ratio at 6.8%, while Deutsche Bank (ETR:DBKGn)'s U.S. operations had the highest ratio at 22.8%.

The test also sets each bank's "stress capital buffer," an extra capital cushion on top of the regulatory minimum, the size of which is determined by each bank's hypothetical losses under the test. The Fed will announce those buffers in the coming months.

Credit Suisse bank analysts this week estimated the average stress capital buffer for big banks will rise to 3.3% from 3.2% in 2021, with the range between 2.5% and 6.3%. The amount of capital lenders will redistribute to shareholders in 2022 will decline roughly 10% from a year earlier, Credit Suisse said.

See an EXPLAINER on the stress tests here:

Fed says U.S. banks can weather severe downturn comfortably
 

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Comments (20)
Mousty Mousty
Mousty Mousty Jun 24, 2022 8:47AM ET
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This report is coming from the people that said infation was temporary until it reached 9% slithering lies over lies or plain incompetence this report to be flushed down the feds endless money pit
Nils Hullmann
Nils Hullmann Jun 24, 2022 4:18AM ET
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us inflation jan 22 7.5%  may 22 8.6% ITS THE PUTINFLATION DEMRATS....i have to repeat myself 100x so people hopefully believe my bullsh9t and the lies of my party...hey nancy how is insider trading going...you think its ok yes ofc..... let them eat cake
Jay Garrelts
Jay Garrelts Jun 24, 2022 1:26AM ET
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That’s how out of touch these people are or how stupid they think you are Banks can handle it comfortably who in their right mind thought that would be OK and good thing to say right now
Forex Harbingers
ForexHarbingers Jun 24, 2022 12:40AM ET
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We are literally playing out the 1918 Spanish Flu events to the T with how the government has handled Covid.
Forex Harbingers
ForexHarbingers Jun 24, 2022 12:40AM ET
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Adam smith, for some reason it wont let me respond on the post. But this is the most historically relevant event to today. Literally identical
Subramanian Venkatram
longshot966 Jun 23, 2022 9:48PM ET
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all the things said before a full blown recession.. when will fed understand that the market is recovering from the pandemic..and almost all of the noise and disruptions in inflation today comes from the war in Ukraine and the strains in global food and energy.. so raising rates.. only adds to an already challenging scenario.. crash and burn more than soft landing sadly.. just feel skeptical
Forex Harbingers
ForexHarbingers Jun 23, 2022 9:48PM ET
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This has absolutely nothing to do with RU/UKR. And everything to do with printing 54% above total US money supply.
Adam Smith
Adam Smith Jun 23, 2022 9:48PM ET
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I totalty disagree with you. Are you saying everytime gov printed more $ & we got into this high inflation? Do you have any historical event to support?
Forex Harbingers
ForexHarbingers Jun 23, 2022 9:48PM ET
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Adam Smith Ahhh, 2000 dot com bust, 2008 bank and housing crisis, and my absolute favorite to describe what we are going through, is the 1918 Spanish Flu where to save the economy they had to take us off the gold standard and to fiat to print an ungodly amount of money, if i remember correctly, it was only 42% of total money supply printed. what happened? Recession, recovery, recession, depression and then recovery after WW because the US controlled the means of production. Can you guess where we are at now?
Jay Garrelts
Jay Garrelts Jun 23, 2022 9:48PM ET
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Adam Smith Trump and Biden doubled the money supply in two months Trump created more money than since the signing of the constitution and those are all facts
nick cage
nick cage Jun 23, 2022 9:07PM ET
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The soft landing is starting to sound like transitory.
Stock Market Genius
Stock Market Genius Jun 23, 2022 8:34PM ET
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Okay so banking stocks gonna crash
Paul Choi
Paul Choi Jun 23, 2022 7:20PM ET
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Like inflation was transitory?
Forex Harbingers
ForexHarbingers Jun 23, 2022 7:20PM ET
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Thats great the banks can handle it, we never thought otherwise. BUT....what about the people? Oh....right.
Nils Hullmann
Nils Hullmann Jun 23, 2022 6:51PM ET
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shall I sell my bear stearns Jim ?
 
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