The US central banking system Federal Reserve has found all 35 largest bank holding companies to be ‘strongly capitalised’ in the supervisory stress tests.
A bank stress test is conducted to assess if a bank will be able to withstand the impacts of economic downturns.
The stress test revealed that the banks will be able to lend to households and businesses even during severe global recession.
The tests included the ‘severely adverse’ scenario with massive global recession and US unemployment rate rising by of 6 to 10 percentage points and a steepening Treasury yield curve.
The banks would register $578bn in total losses in the Federal Reserve’s most severe scenario to date, but their holdings of “high quality capital” would remain above the minimum required.
The tests found that the bank’s aggregate common equity tier 1 capital ratio would drop from 12.3% in the fourth quarter of 2017 to a minimum level of 7.9% in this hypothetical scenario.
Since 2009, all these 35 companies have increased common equity capital by $800bn. These companies hold nearly 80% of the total assets of all banks operating in the country.
Federal Reserve Board vice-chairman Randal Quarles said: “Despite a tough scenario and other factors that affected this year’s test, the capital levels of the firms after the hypothetical severe global recession are higher than the actual capital levels of large banks in the years leading up to the most recent recession.”
All banking organisations should have adequate capital to allow it to absorb losses and effects of recession. This stress test represents the eighth round of evaluation led by the Federal Reserve since 2009.