Fed: Biggest US banks strong enough to withstand recession

Morgan Stanley Barclays Goldman Sachs JPMorgan Credit Suisse Citigroup and Bank of A

Morgan Stanley Barclays Goldman Sachs JPMorgan Credit Suisse Citigroup and Bank of A

The largest USA 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 stress tests showed that these banks' tier one capital ratio, an important indicator for banks' capital levels, will drop to a minimum level of 9.2 percent in the most severe scenario, well above the minimum requirement set by regulators.

"This year's results show that, even during a severe recession, our large banks would remain well capitalized", Fed governor Jerome H. Powell said. "This would allow them to lend throughout the economic cycle, and support households and businesses when times are tough".

Since 2009, the 34 firms have added more than $750bn in common equity capital, the Federal Reserve said.

In the first round, under the tests' hypothetical "severely adverse" scenario, the US would endure a catastrophic recession in which unemployment - now at 4.3 percent - reached at least 10 percent, home prices dropped 25 percent, the stock market plunged about 40 percent and market volatility rose sharply.

The Federal Reserve says all of the country's big banks passed this year's stress test, in which regulators create a scenario where unemployment surges and banks lose hundreds of billions of dollars in loans.

The firms reviewed included Bank of America, JP Morgan Chase and Wells Fargo. The banks, with at least $50 billion in total assets, represent more than 75 percent of domestic banking assets.

Fed officials emphasized that the stress tests don't come with "pass" or "fail" though the results bode well for banks passing the second part of the test next week.

Trump interviewed Robert Mueller for Federal Bureau of Investigation director
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In the past, some banks have been forced to reel back those plans in order to further build capital strength.

Thursday's results also presented the outcome of a less severe "adverse" scenario in which participants' capital ratios only fell to 10.7 per cent.

Thursday's announcement covered what's known as the Dodd-Frank Act Stress Test, which measures banks' capital under stress over nine quarters.

The finding comes from an annual "stress test" conducted by the Federal Reserve.

"Today's results reaffirm that USA 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 USA banks promote economic growth even further", he said. That's when the Fed will announce whether it has approved banks' requests to increase dividends or buy back shares.

The biggest United States banks' own estimates for loan losses were more optimistic than the Fed's - a trend that has arisen in past years as well. Bank of America's was 0.7 of a point worse.

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