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All 31 largest U.S. banks have passed the Federal Reserve’s annual so-called stress tests, leaving regulators confident they can withstand a theoretical scenario in which unemployment rises to 10 percent during a severe recession.
The Fed said Wednesday that in the base case, banks including JPMorgan Chase, Goldman Sachs and Bank of America would lose nearly $685 billion and suffer the biggest capital drain in six years but still meet regulatory minimum standards.
The scenario was accompanied by a 40 percent drop in commercial real estate prices, a substantial increase in office vacancies and a 36 percent drop in house prices.
“This year’s stress test shows that major banks have sufficient capital to weather a highly stressful scenario and meet their minimum capital ratios,” said Michael Barr, the Fed’s vice chairman for supervision.
“The purpose of our test is to ensure that banks have sufficient capital to absorb losses in a highly stressful scenario,” he added.
The tests are used to calculate the minimum amount of capital, used to absorb losses, that banks must hold in relation to their assets.
The banks, which often use the results of the test to keep investors informed of possible shareholder distributions, will provide an update on Friday afternoon on what they expect from their new capital requirement.
Barclays research analyst Jason Goldberg estimated that several major banks, including Goldman and BofA, will see their capital requirements rise more than analysts expected, potentially leaving less capital for potential dividends and buybacks.
Goldman’s shares fell 1.7 percent in after-hours trading, while BofA’s fell 0.3 percent.
The annual exercise began after the 2008 financial crisis and was seen as an important factor in restoring confidence in the banking sector. In recent years, the nation’s largest banks have typically passed the tests by a wide margin, raising questions about their usefulness and purpose.
Matthew Bisanz, a partner in the financial services practice at law firm Mayer Brown, said the tests’ reliance on capital buffers “focuses people on the wrong things.”
“Last March [2023]“We’ve seen three banks disappear in one month,” he said, citing the failures of Silicon Valley Bank, First Republic Bank and Signature Bank. “Yet all these 31 banks survive a nine-quarter stress event. This reinforces how unrealistic the stress test is.”
The results come amid a renewed focus on capital levels at major US banks, with regulators weighing changes to their proposal to implement the so-called Basel III Endgame capital rules.
The Fed’s original proposal, which called for a significant increase in capital requirements, drew an aggressive lobbying effort from major U.S. banks. Fed Chairman Jay Powell has since said he is likely to make material changes to the proposed new rules.
This year’s stress tests would reduce banks’ overall Tier 1 capital ratio, their main buffer against losses, by 2.8 percentage points, the biggest drop since 2018.
The Fed said the larger losses were partly the result of expectations of higher losses on credit card loans for the nation’s largest banks, up nearly 20 percent from a year ago. Banks’ corporate loan portfolios also became riskier, as higher costs and lower fees left lenders with less cushion to absorb a big hit.
Another scenario, which examined what would happen if five major hedge funds failed, showed that the largest and most complex banks had significant exposure and were expected to lose between $13 billion and $22 billion in total.
Additional reporting by Stephen Gandel in New York