U.S. banks can withstand $708B in losses

The largest U.S. banks could absorb more than $708 billion in losses while continuing to lend to households and businesses in a severe global recession, according to the Federal Reserve’s annual stress test released Wednesday.

All 32 banks examined by the Fed remained above minimum capital requirements under the regulator’s hypothetical scenario, which included a rise in unemployment to 10%, a 39% decline in commercial real estate prices and a 30% decline in home prices.

The sector’s Tier 1 capital ratio, which is an important measure of capital to absorb losses during a downturn, fell by 1.6 points during the implementation, remaining comfortably above the required minimum values. The group’s estimated losses include about $200 billion tied to credit cards, $160 billion from commercial and industrial loans and $75 billion from commercial real estate.

“Today’s results underscore the strength of the banking system,” Federal Reserve Deputy Chairman for Supervision Michelle Bowman said in a statement. he said.

The annual exercise comes at a crucial time for bank regulation because, unlike previous years, the results will not affect the amount of capital large banks must hold.

This is because Fed said In February, it was said that stress test buffers would remain untouched until 2027 as regulators reworked the methodology and considered industry complaints, a move that could ultimately reshape how much equity firms should hold against future crises.

Banks will continue to focus on the Basel III Endgame proposal expected later this year rather than stress test results, KBW analysts led by Christopher McGratty said in a June 21 research note that described this year’s implementation as “taking action.”

If this year’s results are included in capital requirements, KBW Morgan Stanley, Citigroup, Citizens Financial And KeyCorp would have seen some of the largest reductions in capital buffers.