Stress Tests Show Largest Banks Are Sturdy, Fed Says

The Fed said Wednesday that the nation’s largest banks are well-capitalized and ready to withstand major economic and financial market shocks after being exposed to a series of hypothetical disaster scenarios.

Regulators began conducting annual stress tests for banks after the 2008 financial crisis, showing banks could survive a 40% decline in commercial real estate prices and cumulative losses of over $5 trillion without bankruptcy. became.

The scenarios faced by the 23 largest banks included a deep recession, a 10% unemployment rate and a sharp drop in house prices.

The regulator’s objective was to determine whether banks had sufficient cash or equivalents to cover sudden and unexpected losses. Banks can decide how much money to return to shareholders through share buybacks and dividends if they know whether regulators deem themselves well-capitalized.

Fed officials said Wednesday they did not expect banks to announce plans to distribute cash to shareholders until Friday.

There was one new thing this year. Regulators will consider whether the eight banks most heavily involved in trading stocks, bonds and other financial instruments can survive these sudden market panics, and will see what they can do, if not contribute. suggested that future stress tests may incorporate similar scenarios. This is especially true for bank capital requirements.

“Today’s results confirm the continuing strength and resilience of the banking system,” said Fed Vice Chairman of Supervisory Michael S. Barr. “At the same time, this stress test is just one way of measuring its strength. We must continue to work to ensure resilience against other stresses.”

The inspection was the new status quo for the banking industry after this spring’s financial crisis, when the bankruptcy of four medium-sized firms, including Silicon Valley Bank, called into question the Fed’s ability to oversee. Wednesday’s results appear to confirm what regulators recently told Congress that the banking system is safe and stable, but they also help resolve the question of whether the Fed’s regulatory practices are strong enough. unlikely to help.

The process of reviewing banks’ performance this year began long before the spring banking crisis, and the scenario reviewing each bank was designed before its failure, so it didn’t represent any response to the crisis, Fed officials said. points out. Said. But it included some of the same factors that caused the failure of local banks like First Republic Bank, including rising interest rates and declining commercial real estate values.

Fed regulators are following a set of rules enacted during the Trump administration, and critics say banks of a certain size range (smaller than the big banks that are too big to fail, but more than some regional and community banks) (large banks) have weakened their supervision. One sign of less scrutiny was evident in Wednesday’s results. Not all banks inspected in 2022 will be reinspected in 2023.

Officials said Wednesday they were reviewing stress-testing rules and other aspects of banking supervisory procedures to see if adjustments could be made to prevent another crisis.

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