The US Federal Reserve System has published the results of its annual stress test, according to which, all 23 banks that participated in this year’s audit have a capital level that is “significantly higher” than the minimum required level during a hypothetical downturn in the economy, CNBC writes.
Such an “apocalyptic” scenario implied a “serious global recession” in the economy, which would hit the owners of commercial real estate and corporate debts, unemployment at 10.8%, and a 55% drop in the stock market.
If the entire banking industry in the United States suffers losses of $474 billion, it will still need capital to mitigate the fall, which is more than twice the minimum required level, as stated in the Fed.
According to the results of the stress test, the Fed said that the largest American banks can easily withstand a serious recession. Bank shares reacted with growth. At the same time, the KBW banking index rose by 1.5% at 17: 00 Eastern time.
The entire banking industry experienced something similar to this scenario last year, when the coronavirus epidemic broke out, which led to widespread economic disruptions. However, thanks to the help of lawmakers and the Fed itself, banks remained afloat during the crisis, having accumulated capital to cover the expected losses on loans, which in most cases did not happen.
The only unpleasant moment for banks during this period was additional rounds of stress tests, as well as restrictions on the ability to pay dividends to shareholders and conduct buyback. Now, these restrictions will be lifted, as the Fed has previously stated.
Deputy Head of the Federal Reserve for Supervision Randal K. Quarles noted that “over the past year, the Federal Reserve has conducted 3 stress tests with various scenarios of a hypothetical recession, and all of them confirmed that the banking system is in a strong position to support the ongoing recovery.”
Now, after passing the “last exam,” the banking industry can calmly breathe and restore a certain degree of autonomy lost since the last crisis.
This autonomy means that banks within the stress capital buffer will have flexibility in the distribution of dividends and repurchases. The stress capital buffer is an indicator of the capital that each bank needs, depending on the riskiness of operations. Due to the pandemic, the implementation of this plan was suspended last year.
“If the bank’s performance is higher than the buffer capital requirement and all other requirements for each quarter, the bank can technically do whatever it wants with respect to repurchases and dividends,” said Ken Usdin, an analyst at Jefferies Bank.
And although banks are still subject to restrictions, and the Fed is confident that the stress capital buffer system will protect their ability to support the economy during a downturn, shortly the entire banking industry can increase buybacks and dividends by tens of billions of dollars, starting in July.