Big U.S. banks’ strong capital levels equip them to continue lending to households and businesses during a severe recession, the Federal Reserve has revealed.
What Happened: All banks held capital above the minimum capital requirement even as they are expected to report an aggregate loss of $612 billion, the results of a Fed stress test showed on Thursday.
Losses of the large banks rose over $50 billion compared to the 2021 test. That included more than $450 billion in loan losses and $100 billion in trading and counterparty losses.
“Under stress, the aggregate common equity capital ratio – which provides a cushion against losses – is projected to decline by 2.7 percentage points to a minimum of 9.7 percent, which is still more than double the minimum requirement,” the Fed said.
Stress tests ascertain whether large banks are robust enough to support the economy during a recession.
The central bank noted that this year’s hypothetical scenario was tougher than in 2021. It included a severe global recession with substantial stress in commercial real estate and corporate debt markets.
The assumptions included:
- Unemployment rate rising 5-3/4 percentage points to a peak of 10%
- GDP declines of 10%
- Nearly 40% drop in commercial real estate prices
- 55% drop in stock prices
Why It’s Important: Apart from relaying a positive signal on the strength of the nation’s banking system, the results also mean big banks are now free to do capital distributions and discretionary bonus payments.
Wall Street firms such as JPMorgan Chase & Co. JPM, Morgan Stanley MS, Citigroup Inc. C, Goldman Sachs Group, Inc. GS and Bank of America Corporation BAC can dole out billions of dollars in dividends and also pay bonuses to their C-suites.
Price Action: The SPDR S&P 500 ETF Trust SPY added 0.98% on Friday before settling at 378.06, according to Benzinga Pro data.