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All 31 of the biggest US banks passed the Federal Reserve’s so-called annual stress tests, satisfying regulators that they could withstand a theoretical scenario in which unemployment rose to 10 percent during a severe recession.
The Fed said on Wednesday that under its baseline scenario, banks including JPMorgan Chase, Goldman Sachs and Bank of America would lose nearly $685 billion and suffer their biggest hit to capital in six years, but would meet still minimum regulatory standards.
The scenario included a 40 percent drop in commercial real estate prices, a significant increase in office vacancies, and a 36 percent drop in housing prices.
“This year’s stress test shows that large banks have enough capital to withstand a very stressful scenario and meet their minimum capital ratios,” said Michael Barr, the Fed’s vice chairman for supervision.
“The purpose of our test is to help ensure that banks have enough capital to absorb losses in a very stressful scenario,” he added.
The tests are used to calculate the minimum amount of capital, which is used to absorb losses, that banks must hold relative to their assets.
Banks, which often use test results to update investors on potential shareholder payouts, will provide an update on Friday afternoon on what they expect their new capital requirement to be.
Barclays research analyst Jason Goldberg estimated that some big banks, including Goldman and BofA, will see their capital requirements rise by more than analysts had predicted, potentially leaving less capital for dividends and potential acquisitions. .
Shares of Goldman fell 1.7 percent in after-hours trading, while those of BofA were down 0.3 percent.
The annual exercise began after the 2008 financial crisis and was seen as a key factor in rebuilding confidence in the banking sector. In recent years, the nation’s biggest banks have generally passed the tests, usually by wide margins, raising questions about their usefulness and purpose.
Matthew Bisanz, a partner in the financial services practice at law firm Mayer Brown, said relying on capital buffers tests “focuses people on the wrong things.”
“Last March [2023], we saw three banks go under in one month,” he said, referring to the failures of Silicon Valley Bank, First Republic Bank and Signature Bank. “However, all 31 of these banks survive a stress event lasting nine quarters. This reinforces how unrealistic the stress test is.”
The results come amid renewed focus around capital levels at big US banks, with regulators weighing changes to its proposal to implement the so-called Basel III capital rules.
The Fed’s initial proposal, which called for a significant increase in capital requirements, provoked an aggressive lobbying effort by major US banks. Fed Chairman Jay Powell has since said he is likely to make material changes to the proposed new rules.
This year’s stress tests will push banks’ aggregate Tier 1 capital ratio, their main hedge against losses, by 2.8 percentage points, the biggest drop since 2018.
The Fed said the bigger losses were partly the result of an expectation of higher losses on credit card loans for the nation’s biggest banks, up nearly 20 percent from a year earlier. Banks’ corporate loan books also became riskier, as higher expenses and lower rates left lenders with less of a cushion to absorb a heavy hit.
Another scenario, examining what would happen if five large hedge funds failed, showed that the largest and most complex banks had material exposure and were projected to lose between $13 billion and $22 billion in total.
Additional reporting by Stephen Gandel in New York