Banks cleared the first round of stress tests conducted by the Federal Reserve Thursday, in a sign that big banks are on track to make it through the annual tests unscathed.
All of the biggest banks made it through the tests without seeing their capital levels fall below the minimum level required by the Fed, suggesting that the central bank sees them as healthy enough to withstand a crisis.
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“This year’s results show that, even during a severe recession, our large banks would remain well capitalized,” Fed governor Jerome Powell said. “This would allow them to lend throughout the economic cycle, and support households and businesses when times are tough.”
The stress tests showed the 34 banks that were tested losing $493 billion altogether over the course of the imagined crisis. Even so, they would maintain minimum capital levels above the requirements.
Thursday’s tests were the first part of the two-part annual stress tests conducted to examine the health of U.S. banks.
In the tests, regulators simulate what would happen to banks’ balance sheets in a financial crisis.
This year, the Fed’s hypothetical crisis included a global recession with unemployment spiking to 10 percent, stock markets collapsing 50 percent, housing prices dropping a quarter, and severe downturns in the U.K., Europe, and Japan.
Thursday’s test results are the first of two, and they are not binding.
Next Wednesday, the Fed will release the results of the second part, which have higher stakes. The second round includes judgments about qualitative aspects of the banks’ management. And if the banks don’t pass, regulators can halt their plans for paying out dividends or buying back shares.
On Thursday, the banking industry projected confidence, and suggested that the banks’ good performance should prompt regulators to ease the burden of rules.
“Today’s results reaffirm that U.S. banks are strong and remain well positioned to continue playing their important role in accelerating economic growth,” said Rob Nichols, head of the American Bankers Association.
Most of the biggest banks, such as a Bank of America and JPMorgan Chase, cleared the tests with nearly double the level of capital required, relative to assets weighted by riskiness.
