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America's biggest banks pass post-crisis stress tests

23 June 2017

The first round of the central bank's annual "stress tests" shows that as a group, the 34 big banks have gained strength thanks to a steadily recovering economy.

The banks were tested to determine if they have large enough capital buffers to keep lending, even if hit with billions of dollars in losses brought on by a financial crisis and severe economic downturn.

The two-part test revealed that the biggest U.S. lenders would be hit by $383bn in loan losses in a hypothetical scenario in which the United States employment rate rose to 10 per cent. Passing the stress test does not necessarily mean a lender will pass the CCAR as the PhDs at the Fed can approve or flunk a bank based on qualitative as well as quantitative grounds. The Fed said the losses would reduce the banks' high-quality capital from 12.5 percent of its loans in the fourth quarter a year ago to 9.2 percent at the end of 2017.

Regulatory advocate Marcus Stanley says these stress tests have created a banking system less susceptible to crisis but, "If these stress tests are weakened in the future, they are going to become significantly less reliable".

This is the seventh year in a row the Fed has run stress tests, which were put in place after the financial crisis.

"This year's results show that, even during a severe recession, our large banks would remain well capitalized", Governor Jerome H. Powell said.

"We see today's. stress test results as a positive for Trump administration efforts to deregulate the banks", Jaret Seiberg, a policy analyst with Cowen & Co, told Reuters. Those banks represent about 75 percent of all US assets.

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All the banks can now amend their plans on dividend payments and stock buybacks to win Fed approval before it announces its decisions on those issues next Wednesday.

Under the Fed's examination, Citi's minimum CET1 ratio in the most stressful scenario was the highest among big Wall Street banks, at 9.7 percent.

Fed Governor Powell said recently that regulators will share more information with the industry during next year's exams after bankers complained the process was too opaque. This year, the Fed projected supplementary leverage ratios at the largest banks.

The Fed can reject a bank's capital plan for either reason.

The results released on Thursday are the first of a two-part exam. The president also will be able to appoint a new Fed chair when Janet Yellen's term expires in February. They then ask what that would do to a bank's balance sheet.

US banks passed the first round of stress tests issued by the Federal Reserve to determine whether the banks could survive potential recessions, according to CNBC.

CIT was added this year to the banks tested by the Fed.

America's biggest banks pass post-crisis stress tests