After exposing them to a series of hypothetical catastrophe scenarios, the Federal Reserve said on Wednesday that the largest US banks are well capitalized and ready to withstand major economic and financial market shocks.
The annual bank stress tests the regulator conducted in the wake of the 2008 financial crisis found they could weather a 40 percent drop in commercial property prices and aggregate losses of more than half a trillion dollars without fail.
Scenarios faced by the 23 largest banks also included a severe economic recession, 10 percent unemployment and a sharp fall in house prices.
The regulators’ goal was to determine whether banks had enough cash or equivalent instruments to cover sudden, unexpected losses. Once banks know whether regulators believe they are sufficiently capitalized, they can decide how much money to return to shareholders through buybacks and dividends.
Senior Fed officials said Wednesday they don’t expect banks to announce plans to return cash to shareholders before Friday.
New this year: regulators were examining whether the eight banks most heavily involved in trading stocks, bonds and other financial products could weather a sudden panic in those markets, and suggested that future stress tests could include similar scenarios , even if they do not contribute specifically to banks’ capital requirements.
“Today’s results confirm that the banking system remains strong and resilient,” said Michael S. Barr, the Fed’s vice chairman for oversight. “At the same time, this stress test is just one way to measure that strength. We should remain humble about how risk can arise and continue our work to ensure banks are resilient to a range of economic scenarios, market shocks and other stresses.”
The tests provided another status report on the banking industry in the wake of this spring’s crisis, when the bankruptcies of four mid-tier lenders, including Silicon Valley Bank, called into question the Fed’s ability to monitor them. While Wednesday’s results appeared to confirm what regulators recently told Congress that the banking system is safe and sound, they are unlikely to help settle the question of whether the Fed’s regulatory practices are strong enough.
The banks’ testing process for this year’s results began well before the spring banking crisis, and the scenarios under which each bank was tested were designed before the bankruptcies, so they were not a response to the crisis, Fed officials say. But they exhibited some of the same factors that brought down regional banks like First Republic Bank, including rising interest rates and falling commercial property values.
Fed regulators follow a set of rules introduced during the Trump administration that critics say have weakened oversight of banks in a certain size range — banks smaller than the “too big to fail” giants, but larger than some regional and municipal banks. A sign of this reduced oversight was evident in Wednesday’s results: not all banks tested in 2022 were retested in 2023.
Officials said on Wednesday they were reviewing stress testing rules, as well as other aspects of their banking supervisory procedures, to see if adjustments could be made to prevent another crisis.
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