Fed: Biggest US banks strong enough to withstand recession

The Federal Reserve released initial results of its yearly stress tests to determine whether the nation's banks are financially strong enough to weather a severe recession
Federal Reserve Issues First Round of Stress Tests, Big Banks Pass
Author

23 June, 2017

The largest US banks collectively showed that they can withstand a severe economic downturn and continued to improve their capital positions, according to the results of Dodd-Frank Act-mandated stress tests the Federal Reserve released today. Shareholders of the fourth-largest USA bank have been clamouring for management to buy back more of its stock, which is trading below what its assets are worth.

"This would allow them to lend throughout the economic cycle and support households and businesses when times are tough", he said.

Powell was one of five regulators testifying before the committee, days after the U.S. Treasury Department unveiled a plan to revamp or undo many rules enacted after the 2007-2009 financial crisis.

The fear is that our banks are so interconnected now that even a small crisis could bring down the financial system. Democrats and consumer advocates largely oppose the plan, saying it would lead to more reckless behavior by the banking industry. Before Thursday's results, analysts predicted banks would be able to return more than US$120 billion to shareholders over the next four quarters, or about 85 percent of their profit.

Once universally dreaded by banks, the Federal Reserve's annual stress tests are getting less stressful.

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The 34 largest banks in the U.S. have money on hand to withstand a severe recession, the USA central bank said on Thursday. That's down from $526 billion in losses for 33 banks previous year. The 9.2 percent level shows improvement from last year's 8.4 percent.

Banks are still subject to a second portion of the test in which the Fed approves or denies their capital plans.

"This year's results show that, even during a severe recession, our large banks would remain well capitalized", said Fed Governor Jerome Powell. Bank executives and many investors hope the Fed will allow lenders to put a lot more capital toward stock buybacks and dividends. The Fed has also seen the tactic as a way to poke around bank balance sheets for weak assets. This year, the Fed projected supplementary leverage ratios at the largest banks. It was the third straight year that the Fed rejected the plan of the USA division of Santander, which is one of Europe's biggest banks, and the second straight rejection for Deutsche Bank Trust Corp., the US transaction bank and wealth management business of Germany's largest bank. Stress tests are simulations regulators run to gauge a bank's ability to weather a downturn.

"If the Fed bets wrong and treats one particular trading strategy as low risk and it's high risk, all the banks will have taken that low-risk bet and it will have turned out very badly", she said.

Citigroup performed the best with a tier 1 capital ratio of 9.7 per cent. Ally Financial and KeyCorp were both below seven per cent.


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