WASHINGTON: All major banks in the United States have passed the Federal Reserve’s annual stress test, designed to assess how well they would fare in a major financial crisis, the central bank said Wednesday.
The Fed found all 23 banks tested “are well positioned to weather a severe recession and continue to lend to households and businesses even during a severe recession,” according to a report it published.
The test results follow widespread banking turbulence in the United States and Europe earlier this year, sparked by the rapid collapse of Californian regional lender Silicon Valley Bank (SVB).
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SVB experienced a bank run by depositors concerned by the impact of rapidly rising interest rates.
“Today’s results confirm that the banking system remains strong and resilient,” Fed Vice Chair for Supervision Michael Barr said in a statement.
But he added: “We should remain humble about how risks can arise and continue our work to ensure that banks are resilient to a range of economic scenarios, market shocks, and other stresses.”
Small local banks and mid-sized regional banks were exempted from these tests.
This year’s stress test assumed the banks would be contending with a severe global recession, significant declines in commercial real estate and house prices, a substantial increase in office vacancies and a sharp jump in the unemployment rate to a peak of 10 percent.
Under this scenario, the Fed found that the banks’ aggregate equity-to-capital ratio – which provides a cushion against losses – would decline by 2.3 percentage points to 10.1 percent.
However, all 23 banks were found to remain above their minimum capital requirements during the hypothetical recession, despite experiencing total projected losses of more than half a trillion dollars.
In a statement, American Bankers Association President Rob Nichols said the test results showed American banks remained strong.
They also indicated that the institutions had “built up significant capital reserves that will allow them to continue lending and supporting our economy even under the most severe economic conditions,” he added.
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