U.S. biggest banks can weather severe recession: Fed's annual bank stress test
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(Kitco News) All 23 of the U.S. biggest banks are well positioned to weather a severe recession scenario and continue to provide lending to households and businesses, the Federal Reserve said in its annual bank stress test.
The Fed's stress test is meant to ensure that large banks can support the economy during economic downturns. The test measures capital levels, losses, revenue, and expenses under a hypothetical recession and financial market shock scenario.
The results revealed that all 23 of the U.S. biggest banks could remain above their minimum capital requirements despite total projected losses of $541 billion, the Fed said in its release.
"Today's results confirm that the banking system remains strong and resilient," said Federal Reserve Vice Chair for Supervision Michael Barr. "At the same time, this stress test is only one way to measure that strength. 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."
The 2023 test examined a severe global recession scenario with a 40% decline in commercial real estate prices, a 10% unemployment rate, a jump in office vacancies, and a 38% decline in housing prices.
And even though the large banks will witness heavy losses, they can continue lending, according to the Fed. "The large projected decline in commercial real estate prices, combined with the substantial increase in office vacancies, contributes to projected loss rates on office properties that are roughly triple the levels reached during the 2008 financial crisis," the Fed pointed out.
From the total of $541 billion of projected losses, more than $100 billion will be in commercial real estate and residential mortgages and $120 billion in credit card losses, according to the central bank.
The Fed also conducted a market shock analysis. "The results showed that the largest banks' trading books were resilient to the rising rate environment tested," the Fed said. "The individual results from the stress test factor directly into a bank's capital requirements, mandating each bank to hold enough capital to survive a severe recession and financial market shock."
Federal Reserve Chair Jerome Powell commented that the FOMC is carefully monitoring any further tightening of credit conditions from the banking stress witnessed in March.
"Part of the decision not to raise rates in June was the bank stress we experienced earlier this year. When something like this happens, credit availability can move down with a lag," Powell said during the ECB Forum's panel discussion in Sintra, Portugal.
The gold market saw a dip following the bank stress test release, with spot prices last trading at $1,907.40 an ounce, down 0.33% on the day.