Major US banks pass Fed stress test

The Fed announced the results of its annual stress test of 31 major US banks, including Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo.

In a statement released by the bank, it said that while the big banks will be exposed to larger losses compared to last year’s test, they are well positioned to weather a severe recession and stay above minimum capital requirements.

Scenarios based on assumptions in this year’s stress test include a severe global recession with a 40 percent decline in commercial real estate prices, a significant increase in vacant offices and a 36 percent decline in housing prices, the statement said, noting that the scenario predicts that the unemployment rate reaches a peak of 10 percent and economic output falls proportionally.

The statement said that although the scenarios remained relatively unchanged compared to last year, this year’s test resulted in a larger capital decline due to the banks’ corporate loan portfolios becoming riskier, the increase in credit card debts and high default rates, and the decline in profit expectations.

Fed Vice President for Supervision Michael Barr said that this year’s stress test showed that large banks have sufficient capital to withstand a highly stressful scenario and meet minimum capital ratios.

Stating that although the weighting of this year’s stress test was similar to last year’s, the test resulted in higher losses due to slightly riskier bank balance sheets and higher expenses, Barr said: “The purpose of our test is to help ensure that banks have enough capital to cover losses in an extremely stressful scenario. This test shows that they have that.”