23 Biggest US Banks Will Survive Severe Economic Crisis This is the Federal Reserve’s conclusion based on its annual stress test.
The US Federal Reserve tested whether banks would have enough cash if unemployment rose to 10 percent. It also looked at what would happen if commercial real estate lost 40 percent of its value.
Banks would lose more than $500 billion in such a scenario. Thanks to their financial buffers, they avoid bankruptcy.
The regulator’s deputy chairman, Michael Barr, warned that banks’ stability could be assessed in a number of other ways.
“We must remain humble about how risk may arise and continue our efforts to ensure that banks can withstand various economic scenarios, shocks and other stresses,” Barr said.
That sentiment follows the bankruptcies of several mid-sized banks in the US earlier this year. In the case of the collapsed Silicon Valley Bank, among others, the rapid increase in interest rates caused problems in the lender’s investment portfolio.
Also look at rapidly rising inflation and interest rates
Banks also conducted an “exploratory” test in the face of rapidly rising inflation and interest rates. According to the regulator, this shows that “the biggest banks” can survive such a situation well. These results are not factored into the assessment of banks’ capital buffers.
Barr previously said he wanted to test scenarios involving several types of financial shocks to banks. In this, he wants to include, among other things, the recent bankruptcies of American banks.
Investors in banks are keenly watching the stress tests conducted by firms such as Goldman Sachs, JP Morgan, Wells Fargo and Morgan Stanley. If these companies succeed, shareholders are in principle allowed to pay dividends or buy back their own shares.
But banks are expected to be cautious about those distributions to shareholders this year. Federal Reserve Chairman Jerome Powell recently indicated that new capital requirements would require lenders to maintain more buffers.
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