Big Banks 34-for-34 on Fed Stress Tests

Capital plans will be approved or disapproved next week.
William SprouseJune 23, 2017
Big Banks 34-for-34 on Fed Stress Tests

The biggest U.S. banks and financial institutions have enough capital to withstand a crisis, according to the results of stress tests administered by the Federal Reserve, CNBC reports.

Regulators posed two scenarios for the financial institutions. One was similar to the 2008 financial crisis. The other was less severe. Under the first scenario, banks lost a projected $493 billion. In the second, losses were $322 billion.

The Fed said under both scenarios, banks “would experience substantial losses.” In total, however, the institutions “could continue lending to businesses and households, thanks to the capital built up by the sector following the financial crisis.” Thirty-four out of 34 banks made it through.

“This year’s results show that, even during a severe recession, our large banks would remain well capitalized,” Fed Governor Jerome Powell said in a statement. “This would allow them to lend throughout the economic cycle, and support households and businesses when times are tough.”

The results could bolster arguments from Republicans and the Trump administration that the financial system is sound, and regulations can be relaxed. This was the third straight year all the banks tested met the Fed standards.

In a statement, Rob Nicholas, President of the American Bankers Association, said, “Today’s results reaffirm that U.S. banks are strong and remain well positioned to continue playing their important role in accelerating economic growth.”

“Banks’ robust capital and liquidity positions would allow them to continue to function well under even the most extreme scenarios,” he added.

Next week, the Fed will approve or disapprove the capital plans under which banks would be able to return cash to shareholders. There are indications some banks want to return more than 100% of profits, CBNC reported.

Success in the stress test does not automatically mean capital plans will be approved.