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June 24, 2022

US banks clear Federal Reserve’s annual stress test

The Federal Reserve has cleared all major US banks in the annual stress test that shows the lenders will remain resilient in a severe recession.

The central banking system in the US conducts stress tests to assess if the banks can support the economy during hypothetical downturns.

In a statement, the Federal Reserve said that banks will incur a combined loss of $612bn in the worst-case scenario.

However, they will continue to maintain their minimum capital requirements during such shocks. The aggregate common equity capital ratio will fall by 2.7 percentage points to 9.7%, more than double the banks’ minimum requirement.

“The Board’s stress tests help ensure that large banks can support the economy during economic downturns. The tests evaluate the resilience of large banks by estimating their capital levels, losses, revenue and expenses under hypothetical scenarios over nine future quarters,” the Fed statement added.

The Fed designed a tougher hypothetical scenario this year, compared to the 2021 test.

This involved testing the banks in a severe global recession with substantial stress in commercial real estate and corporate debt markets.

The scenario envisaged unemployment rate rising to 10%, along with a commensurate decline in GDP.

It also assumed a 40% decline in commercial real estate prices and a 55% fall in stock prices.

The positive results will enable large banks to use the excess capital for share buybacks and to pay dividends.

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