Biggest US banks clear first hurdle in Fed's annual stress tests

Robyn Valdez
June 23, 2017

The results of the first part of the central bank's so-called stress tests showed 34 major lenders were on solid capital footing, the Fed said.

The banks were tested to determine if they have large enough capital buffers to keep lending, even if hit with billions of dollars in losses brought on by a financial crisis and severe economic downturn.

The most severe hypothetical scenario projects $383 billion in loan losses at the 34 participating bank holding companies during the nine quarters tested. The Fed said the losses would reduce the banks' high-quality capital from 12.5 percent of its loans in the fourth quarter previous year to 9.2 percent at the end of 2017.

"Lending has expanded overall by the banking system, and also to small businesses", Federal Reserve Chair Janet Yellen said in February.

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US financial regulators and lawmakers who appeared at a congressional hearing on Thursday generally agreed that the Volcker rule, which restricts banks' ability to make bets with their own money, needs to be reconsidered.

The report, which was released by the Treasury Department, recommended giving the president the power to fire the head of the Consumer Financial Protection Bureau, giving Treasury greater power to oversee bank regulators, requiring regulatory agencies to analyze the cost of new rules and stripping the Federal Deposit Insurance Corp. of its responsibility to oversee banks' plans for how they should be unwound if they fail.

"This year's results show that, even during a severe recession, our large banks would remain well capitalized", Fed Governor Jerome Powell said in a statement announcing the central bank's findings Thursday. Those banks represent about 75 percent of all US assets.

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.

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The other five largest banks, JPMorgan, Bank of America, Wells Fargo & Co (WFC.N), Goldman Sachs Group Inc (GS.N) and Morgan Stanley (MS.N), showed common equity Tier 1 capital ratios between 8.4 and 9.4 percent in the Fed's most aggressive scenario.

All of the major banks are expected to pass this year, which is good news if you want to see the USA financial system survive a future crisis. Capital is the cushion a bank holds against losses.

It's the third consecutive year there have been no banks failing. With the Dodd-Frank results in hand, now banks have the option of revising their capital plans before CCAR is released.

Mr. Warsh also hinted that the Fed could eventually be at risk of being dismantled if it doesn't make needed changes from within. But the bank can not do so without the Fed's approval.

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