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All 31 of the largest U.S. banks have passed the Federal Reserve’s annual so-called stress tests, convincing regulators that they could withstand a theoretical scenario in which unemployment rises to 10 percent during a deep recession.
The Fed said on Wednesday that under its base case scenario, banks including JPMorgan Chase, Goldman Sachs and Bank of America would lose about $685 billion, their biggest capital loss in six years, but still meet minimum regulatory standards.
In this scenario, commercial real estate prices would fall by 40%, office vacancy rates would increase dramatically, and home prices would fall by 36%.
“This year’s stress tests show that large banks have enough capital to withstand extremely stressful scenarios and meet minimum capital ratios,” said Michael Barr, the Fed’s vice chairman for supervision.
“The purpose of our tests is to ensure that banks have enough capital to absorb losses in extremely stressful situations,” he added.
This test is used to calculate the minimum amount of loss-absorbing capital that banks must hold against their assets.
The bank frequently uses the results of the tests to update investors on potential shareholder dividends and is due to provide an update on Friday afternoon on its outlook for how much its new capital requirements will be.
Barclays research analyst Jason Goldberg estimated that capital requirements for several big banks, including Goldman Sachs and Bank of America, could rise more than analysts had expected, leaving less capital available for dividends and share buybacks.
Goldman shares fell 1.7% in after-hours trading, while Bank of America shares fell 0.3%.
The annual tests began after the 2008 financial crisis and were seen as a major factor in restoring confidence in the banking sector. In recent years, the country’s largest banks have generally passed the tests, with large margins raising questions about their usefulness and purpose.
Matthew Bisanz, a partner in the financial services practice at law firm Mayer Brown, said the test’s reliance on capital buffers “is making people focus on the wrong thing.”
“Last March [2023]”In the 1990s, three banks failed in one month,” he said, referring to the collapses of Silicon Valley Bank, First Republic Bank and Signature Bank. “Yet all 31 of these banks survived a stress event that lasted nine quarters. This underscores how unrealistic stress tests are.”
The findings come as capital levels at big U.S. banks come under renewed focus as regulators consider changes to proposed implementation of so-called Basel III end-game capital requirements.
The Fed’s initial proposal called for a big increase in capital requirements, sparking aggressive lobbying by big U.S. banks, and Fed Chairman Jay Powell has since said he is likely to make significant changes to the proposed new rules.
This year’s stress tests caused banks’ tier 1 capital ratio, their main buffer against losses, to fall by 2.8 percentage points, the biggest drop since 2018.
The Fed said the wider losses were due in part to projections that losses on credit-card loans at the nation’s largest banks would rise about 20% from a year ago. Rising expenses and lower fees left banks with less room to absorb a deeper hit, and banks’ corporate loan books also became more risky.
Another scenario examined what would happen if five large hedge funds collapsed, projecting that the largest and most complex banks would face significant risks, with total losses ranging from $13 billion to $22 billion.
Additional reporting by Stephen Gandel in New York
