Biggest US banks clear first hurdle in Fed's annual stress tests

Posted June 23, 2017

The first round of the central bank's annual "stress tests" shows that as a group, the 34 big banks have gained strength thanks to a steadily recovering economy.

The test applies to more than 30 of the biggest banks in the country, and aims to ensure that banks have enough cash reserves to withstand a severe global recession like the 2008 financial crisis.

The "severely adverse" scenario features a severe global recession with the US unemployment rate rising by approximately 5.25 percentage points to 10 percent, accompanied by heightened stress in corporate loan markets and commercial real estate.

A Fed official said Thursday that the results show the industry is well-capitalized and credited the reforms with boosting lending for banks.

Wall Street banks have enough armor to shield Americans from another financial crisis.

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Under the Fed's worst-case stress test scenario, the USA unemployment rate more than doubles to 10 percent.

Aggregate Tier 1 capital ratios at the 34 firms subjected to the Fed's stress-test program would fall from an actual 12.5 percent in the fourth quarter of 2016 to a minimum of 9.2 percent under the test's most extreme hypothetical scenario - which includes, among other things, 10 percent unemployment, falling treasury rates, a 25 percent decline in home prices and a 35 percent drop in commercial real estate prices. The 34 banks represent more than 75 percent of the assets of all USA domestic banks, said the Fed. But the bank can not do so without the Fed's approval. Bank executives and many investors hope the Fed will allow lenders to put a lot more capital toward stock buybacks and dividends. This year's results are all the more consequential seeing as they're the last stress tests banks will ever have to face now that we live in Trump's America.

BB&T projected having $5.4 billion in net revenue during the period and a loan-loss provision of $7.9 billion. It was the third straight year that the Fed rejected the plan of the US division of Santander, which is one of Europe's biggest banks, and the second straight rejection for Deutsche Bank Trust Corp., the USA transaction bank and wealth management business of Germany's largest bank. "They just can't get any money because the banks just won't let them borrow it because of the rules and regulations in Dodd-Frank". The regulators said that, although there have been improvements, the banks continue to show weaknesses in supervision that could harm their capital planning.

The tests have become less dramatic in recent years with fewer quantitative failures. Bank of America's was 0.7 of a point worse.