The 34 largest US banks have all cleared the first stage of an annual stress test, showing they would be able to maintain enough capital in an extreme recession to meet regulatory requirements, the Federal Reserve said on Thursday.
Although the banks, including household names like JPMorgan Chase & Co and Bank of America, would suffer $383 billion in loan losses in the Fed’s most severe scenario, their level of high-quality capital would be substantially higher than the threshold that regulators demand, and an improvement over last year’s level.
“This year’s results show that, even during a severe recession, our large banks would remain well capitalised,” said Fed Governor Jerome Powell, who leads banking regulation for the central bank. “This would allow them to lend throughout the economic cycle, and support households and businesses when times are tough.”
The Fed introduced the stress tests in the wake of the financial crisis to ensure the health of the banking industry, whose ability to lend is considered crucial to the health of the economy.
Since the first test was conducted in 2009, big banks have seen losses abate, loan portfolios improve and profits grow. The banks that now undergo the exam have also strengthened their balance sheets by adding more than $750 billion in top-notch capital, the Fed said.
Banks and their investors have been hoping the improvements would prompt the Fed to allow them to use more capital for stock buybacks and dividends, especially as the Trump administration is seeking to relax financial regulations.