Majority of big banks in the US have passed the Dodd-Frank Act Stress Test 2014 conducted by the Federal Reserve and are better positioned to meet their financial commitments.
Despite the current economic crisis, the results turned out to be better than five years ago.
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The latest stress test, which subjected 30 bank holding companies to most extreme stress scenarios, found that the projected loan losses would total $366bn during the nine quarters of the hypothetical stress scenario.
Additionally, the aggregate tier 1 common capital ratio would fall from an 11.5% in the third quarter of 2013 to 7.6% in the hypothetical stress scenario.
Some of the extreme stress scenarios that were considered include a deep recession with a sharp rise in the unemployment rate, a drop in equity prices of nearly 50%, and a decline in house price to levels last seen in 2001.
According to Federal Reserve, capital is important to banking organisations, financial system and the economy because it absorbs losses and helps to ensure that losses are borne by shareholders, not taxpayers.
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By GlobalDataFederal Reserve Bank governor, Daniel K Tarullo, said the annual stress test is one of the Federal Reserve’s most important tools to gauge the resiliency of the financial sector and to help ensure that the largest firms have strong capital positions.
"Each year we are making substantial improvements, which have helped make the process even stronger than when we first conducted the stress tests in the midst of the financial crisis five years ago," Tarullo added.
