Fed Says Big Banks Can Weather a Recession
As inflation remains stubbornly high and warning indications of a looming slump mount, the annual exams have added significance.
Officials from the Federal Reserve declared on Thursday, following an annual examination of the big banks' resilience, that the nation's largest financial institutions have sufficient capital reserves and would withstand a severe economic recession. The tests took on a new level of importance as a number of economic indicators, such as a slowdown in home sales and an increase in interest rates, looked to increase the probability of a recession occurring in the not too distant future.
The Federal Reserve conducted a series of stress tests on the nation's 34 largest banks to determine how well their balance sheets would fare in the face of sharp declines in asset prices and a total of $612 billion in losses. These losses were primarily the result of tensions in the markets for commercial real estate values and corporate debt. Even if the worst-case scenario came to pass, each bank was well-equipped to meet the minimum capital requirements set by the authorities.
Following the events of the financial crisis in 2008, regulators have been conducting annual inspections of the financial industry. These tests are a component of that inspection. The Federal Reserve creates a hypothetical disaster scenario each year with the help of a snapshot of the economy taken at the end of the preceding year — in this case; it was the fourth quarter of 2021 —to design a scenario that is proportionate to the strength of the economy at present. The more favorable the actual state of the economy is, the worse the stress-test scenario will be.
During a phone call with journalists on Thursday, Fed officials highlighted that the hypothetical scenario used by the Fed to test the stability of the banks is not a prediction for the future. They went on to say that the success of the banks in this year's testing was especially noteworthy considering that several of the banks had recently gotten rid of cash and distributed a portion of the reserves they had kept aside during the Covid-19 outbreak in preparation for sudden losses.
The scenario used for the stress tests in 2022 was more severe than the one applied to banks the previous year since the economy had shown signs of improvement in the meantime. Additionally, all 22 of the banks that were examined the year before passed. Not all of the major financial institutions are audited on an annual basis. Some are not large enough to be eligible for yearly examinations and are. As a result, they are only put through the process once every two years.
In a statement that was emailed to journalists, Francisco Covas, the head of research at the Bank Policy Institute, which is a trade group representing many of the country's largest banks, said that the scenario that the Fed had devised for this year's tests was worse than any recession since World War II, including the one that occurred after the 2008 financial crisis. Covas' comments were made about the fact that the scenario that the Fed had devised for this year's tests was worse than any recession that
According to Mr. Covas, "large banks continue to be in a strong position to lend to families and businesses and promote the expansion of the economy in the United States."
However, he did issue a warning that if the requirements for banks' capital were to continue to be raised, the ability of banks to lend money might be limited.
A number of the largest institutions, such as Morgan Stanley, Wells Fargo, and JPMorgan Chase, among others, upped their dividends to shareholders with the consent of the Federal Reserve just a few days after passing the tests from the previous year.
After the markets have closed on Monday, the major financial institutions will likely make an announcement regarding the magnitude of their distributions for the current year.
Fed Says All Banks Passed Stress Tests