WASHINGTON — The largest U.S. banks are still able to withstand a severe economic and financial crisis, according to the Federal Reserve. The U.S. central bank announced the results of its annual stress test. Vice Chairman for Banking Supervision Michael Barr said that the losses that lenders will suffer in this year’s test were larger than last year’s.
Through stress testing, the Fed checks whether the largest banks in the United States have enough capital after periods of major economic downturns. The results also determine the minimum buffers that banks must hold.
The Fed’s crisis scenarios vary each year. This year, the regulator is looking at, among other things, what impact a 6-percentage-point rise in unemployment would have on banks’ balance sheets. The central bank is also investigating what would happen to banks if commercial real estate prices fell by 40 percent. For banks with a large commercial branch, the Fed is also looking at how the shock would impact international financial markets.
31 banks
This year, 31 banks were tested. That’s a lot more than last year, when there were 24. That’s because banks with a total balance sheet of between $100 billion and $250 billion are also being considered.
“While the severity of this year’s stress test is similar to last year’s, the test resulted in larger losses due to riskier balance sheets and higher costs,” Barr said, adding that all banks are well capitalized.
Credit Cards and Loans
The higher risks are primarily for customers with credit cards and business loans. In addition, higher costs mean less profit from commissions, for example, which makes it more difficult to recoup losses, according to the Federal Reserve.
A key indicator for banks, the CET1 capital ratio, was tested this year at 9.9 percent. That was 12.7 percent a year ago. The minimum requirement is 4.5 percent.
The annual stress test was implemented in the wake of the Great Financial Crisis, which caused major upheaval over the survival of banks between 2007 and 2009. The Fed wanted to restore confidence by regularly checking whether reserves were strong enough.
