The largest banks in the United States are well-capitalized and have the potential to survive a serious recession, the Federal Reserve announced Thursday after an annual review of the resilience of major banks. Testing has gained new importance as some economic indicators, such as slowing home sales and rising interest rates, seemed to increase the likelihood of a recession in the near future.
The Federal Reserve Board is investigating how the balance sheet can withstand sharp declines in asset prices and total losses of $ 612 billion, primarily caused by the value of commercial real estate and stress in the corporate market. Debt tested 34 largest banks operating in the United States. Each bank had sufficient capital to meet the minimum requirements of the regulatory agency, even in the worst-case scenario.
This test is part of an annual inspection that regulators began conducting in the financial industry after the 2008 financial crisis. Each year, the Fed uses economic snapshots taken at the end of the previous year (this time in the fourth quarter of 2021) to design fictitious disaster scenarios commensurate with the current strength of the economy. The better the real economy, the worse the stress testing scenario.
The hypothetical situation that the Federal Reserve uses to test banks is not a future prediction, officials said Thursday in a phone call with journalists. They said that the bank’s success in this year’s test released some of the reserves that many banks had set aside during the Covid-19 pandemic to dispose of cash and prepare for sudden losses. He added that it is particularly noteworthy when considered.
The 2022 stress test scenario was worse than the scenario applied to banks last year due to economic improvements in the meantime. All 22 banks tested last year also passed. Not all major banks are tested every year. Some are too small to qualify for the annual exam and instead only take the exam every other year.
A few days after passing last year’s tests, some of the major institutions such as Morgan Stanley, Wells Fargo and JPMorgan Chase increased their shareholder payments with the Fed’s approval.
Large banks may announce this year’s payments on Monday after the market closes.
