The Federal Reserve said on Wednesday that its annual bank stress tests showed that large U.S. financial institutions have enough capital to withstand an economic crisis, but noted risks to banks’ balance sheets were growing.
The high-profile tests subjected banks to a series of theoretically dramatic financial system shocks and showed that the biggest banks could suffer hypothetical losses of about $685 billion and still have more capital than regulators’ minimum common equity requirements.
The Fed’s vice chairman for supervision, Michael Barr, said the stringency of the tests would be similar to last year’s, but the theoretical losses would be higher this time because “banks have somewhat riskier balance sheets and somewhat higher expenses.” The 2023 losses were $541 billion.
“Banks are well positioned to withstand the specific hypothetical downturn we tested, but the stress tests also identified areas that require attention,” Barr said in a statement on Wednesday.
The Fed attributed the projected increase in credit card losses to rising credit card balances and delinquency rates at banks, heightened risks in banks’ corporate credit card portfolios, and a combination of rising expenses and declining fee revenues as contributing factors to the losses.
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This year, the Fed has inspected 31 of the largest U.S. banks, including JPMorgan Chase.
,
Bank of America
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Wells Fargo
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Mid-sized regional financial institutions like Regions Financial and Fifth Third Bancorp
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This year’s hypothetical scenario is roughly equivalent to the scenario for 2023. This year’s elements included a severe global recession with commercial real estate prices falling 40%, home prices dropping 36% and unemployment rising to 10%.
Under these hypothetical conditions, banks’ overall common equity Tier 1 capital ratio would fall 2.8 percentage points to 9.9% from 12.7%, a larger drop than the 2.5 percentage point drop last year but within the same range as recent stress tests, the Fed said.
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The results of the Fed’s annual stress test are being closely watched by analysts and investors because they will show how the largest U.S. banks, which businesses and consumers rely on for credit and other needs, would fare in a severe economic downturn.
The test, created after the 2008 financial crisis, helps determine how much capital banks must hold to weather an economic downturn. It also indicates whether and by how much they can increase the dividends they pay to shareholders and their share-buyback programs.
The findings come as U.S. financial regulators consider sweeping changes to the levels of capital big banks must hold on their balance sheets, a move that is widely opposed by financial institutions, though the industry expects regulators will ultimately water down their original proposals in favor of the big banks.
Email Rebecca Ungarino at rebecca.ungarino@barrons.com
