Key control
- The annual stress test of the Federal Reserve found that the big banks would remain resistant during an extreme recession.
- The annual stress test is designed to examine whether the big banks could survive a hypothetical recession without government assistance.
- The test results occur when the central banks reflect on the changes in the test that would make it more transparent.
The largest banks in the country can be kept afloat comfortably if a severe recession hits due to their considerable cushions, said the Federal Reserve in its last health control in the industry.
Annual stress tests design an unpleasant scenario for the economy and examine whether the big banks could survive, without the need for governmental help, as in 2008. The latest results showed that banks such as JPMorgan Chase, Wells Fargo, Citigroup and Bank of America could comfortably resist those blows and keep loans to homes and companies.
“The big banks remain well capitalized and resistant to a variety of severe results,” said the Vice President of the Fed supervision for Michelle Bowman supervision in a press release.
This year’s scenario was a little easier than in 2024, but nevertheless presented a brutal recession. The Fed tested the capacity to recover the banks under an unemployment rate that reached its maximum point at 10%, the prices of the shares fell 50% and a drop of approximately 30% in housing prices and commercial real estate values.
That hypothetical recession would inflict losses of $ 550 billion in the 22 banks that the Fed tested, as users of credit cards, companies and other borrowers for breach of its loans. However, all these banks would maintain cushions well above the minimum levels required by the Fed.
A key relationship that the Fed uses to determine if the banks have enough capital would fall to 11.6% throughout the industry on stage, below 13.4% at the end of 2024. But that is well above the minimum requirement of 4.5%.
Other banks that the Fed reviewed this year include lenders such as PNC Financial Services, Capital One Financial, US Bancorp, M&T Bank and Truist Financial. The exams also include main banks of Wall Street such as Goldman Sachs and Morgan Stanley, as well as the US branches of several large foreign banks.
The Financial Services forum said in a statement the results “confirm the strong capital positions of the largest American banks”, which have remained resistant in the annual evidence after more than a decade.
But Better Markets, a defense group that seeks stronger regulations, said that the history of 100% of the tests shows that they are “without stress, ineffective and endanger all Americans” by incorrectly measuring the risks of banks for a recession.
What follows for stress tests?
The results occur when the Fed weighs a proposal to make the annual results of the banks less volatile and other changes that are probably friendly to the industry.
Banks have long argued that the Fed process is opaque and is subject to unpredictable results, which makes banks less capable of lending. However, critics Let’s say that a certain optics is precisely the point, since the tests are rigured and limited the ability of banks to find solutions.
Commercial groups demanded the Fed in December for the issue, a battle that has now stopped now that the Fed is weighing the changes in annual exams. The Fed was partly hindered by a case of the Supreme Court last summer, which was restarted in the power of federal regulatory agencies.
On Friday, the Fed reiterated that “it intends to improve the transparency of the stress test process” by revealing models to determine the losses of banks in advance. The agency says it would lead to a valuable feedback that could improve if the tests will properly evaluate the risks.
The regulator is also proposing to reduce the annual volatility of the results of the stress tests averaging the results for two years.
