Recession is coming .. but it’s strong enough to protect America through

© Reuters. – Major US banks have released an interpretation of the US Federal Reserve’s annual economic health measure as part of a vote on sector confidence amid indications that the US economy could slide into a recession in the coming months.

The results of the Fed’s annual “stress” test showed that the banks have enough capital to withstand the severe economic downturn and pave the way for the issuance of share buybacks and dividend payments.

The central bank said the 34 banks with assets of more than $ 100 billion overseen by the Federal Reserve would collectively suffer losses of $ 612 billion under a severe hypothetical slowdown.

But this will leave them with almost double the amount of capital required by their rules.

As a result, banks including JPMorgan Chase (NYSE: JPM), Bank of America (NYSE: BAC), Wells Fargo (NYSE: WFC), Citigroup (NYSE: C) and Morgan Stanley (NYSE: MS), Goldman Sachs (NYSE: NYSE) 🙂 – use their excess capital to issue dividends and repurchases to shareholders. These plans may be announced after trading closes Monday.

“We consider it as positive for large banks as one would expect from the annual stress test,” Jarrett Seiberg, an analyst at Queen Washington Research Group, said in a research note. “Banks have not only performed well. Tests show that banks can withstand a severe recession with declining commercial real estate market, stock values ​​and rising unemployment.”

The country’s largest banking group welcomed the results as a sign of the sector’s financial strength. But Sherrod Brown, the Democratic chairman of the U.S. Senate Banking Committee, criticized the practice as not being strict enough.

What is an annual stress test?

In the annual stress test set in the wake of the 2007-2009 financial crisis, the Fed assesses how banks’ balance sheets will act against a so-called severe economic downturn. The results determine how much capital banks need to be in good shape and how much they can return to shareholders.

With scenarios set for 2022 ahead of the Russian invasion of Ukraine and current expectations of hyperinflation, the results should give investors and policymakers some relief as the country’s banks are well prepared for what economists warn of a possible recession in the United States later this year or next year.

The 34 banks suffered huge losses in this year’s scenario, as the economy shrank by 3.5%, driven in part by a decline in commercial real estate assets, and the unemployment rate rose to 10%. But even then, the Federal Reserve said the banks’ total capital ratios are still almost double the minimum amount required by regulators.

strong performance

In 2020, the Fed eliminated the “pass and fail” test model and introduced a more nuanced bank capital system.

The test determines whether banks will stay above the required minimum capital ratio of 4.5% – a precautionary measure as banks will have to absorb potential losses. Banks that perform well usually stay much higher.

The Fed said the average capital ratio for the 34 banks was 9.7%. That compares with 10.6% last year, when the Fed tested 23 lenders against a slightly easier scenario.

The average proportion of the country’s eight banks of “global systemic interest” being tested was 9.64%, according to a Reuters analysis of the results.

Shares of Bank of America, which had the lowest percentage of GSIBs at 7.6%, fell in after-hours trading, as did Citigroup, which had a share of 8.6%. Shares in State Street (NYSE: STT), which came in at 13.2%, jumped slightly.

Units of foreign banks in the United States passed the test, with the average capital ratio of the seven banks tested reaching 15.2%.

Overall, regional lender Huntington Banks Incorporated (NASDAQ: HBAN) had the lowest ratio at 6.8%, while Deutsche Bank (ETR: ETR :)’s operations in the US had the highest at 22.8%.

The test also identifies each bank’s “capital reserve”, which is an additional capital instrument above the regulatory minimum, the size of which is determined by each bank’s hypothetical losses under the test. The Fed will announce those buffers in the coming months.

Credit Suisse analysts estimated this week that the average hedge capital reserve of large banks will rise to 3.3% from 3.2% in 2021, with a range of 2.5% to 6.3%. Credit Suisse said the amount of capital that will be redistributed to shareholders in 2022 will decrease by about 10% from the previous year.

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