The nation’s banks would hold up well if another financial crisis struck, according to the results of “stress tests” released by the Federal Reserve Thursday.
The central bank’s Board of Governors said that the tests, in which the banks go through a hypothetical recession, indicate that the 35 biggest banks are “strongly capitalized and would be able to lend to households and businesses during a severe global recession.”
“The capital levels of the firms after the hypothetical severe global recession are higher than the actual capital levels of large banks in the years leading up to the most recent recession,” Fed Vice Chairman for Supervision Randal Quarles said.
The hypothetical recession in this year’s stress tests including the unemployment rate shooting up to 10 percent, with crashing stock and housing markets.
The Fed has been conducting the stress tests since the 2008 financial crisis, and Thursday’s results are the eighth round of the exams.
Thursday’s results are just the first part of the annual stress tests, examining what would happen to banks’ capital in a crisis. Next week, the Fed will release the results of the second part, which also examines banks’ plans for dividends and buyouts and includes the strength of their management. If the Fed finds problems in the second part, it can prevent banks from returning money to investors. Last year was the first year that all banks received a passing grade.
Thursday’s results suggest that the banks are well-positioned for that test, in terms of capital. Even in a scenario in which they lost $578 billion, the banks as a group would stay well above regulatory capital minimums.
Capital requirements effectively limit banks’ indebtedness. They mean that banks must fund their operations using more equity, such as shares, and less by borrowing. The idea is that more capital allows banks to absorb greater losses without becoming insolvent or facing the risk of missing a payment to creditors.
