U.S. Fed says banks can weather severe downturn comfortably

Citizens Financial (Delaware)

23/06/2022 21:30

By Pete Schroeder and Michelle Price
    WASHINGTON, June 23 (Reuters) - The largest U.S. banks would
remain well capitalized in the event of a severe economic shock,
the U.S. Federal Reserve said on Thursday after the lenders'
annual health check, paving the way for them to issue buybacks
and dividends.
    The 34 lenders the Fed oversees with more than $100 billion
in assets would suffer a combined $612 billion in losses under a
hypothetical severe downturn, the central bank said, but that
would still leave them with roughly twice the amount of capital
required under its rules. 
    As a result, banks including JPMorgan Chase  JPM.N , Bank of
America  BAC.N , Wells Fargo  WFC.N , Citigroup  C.N , Morgan
Stanley  MS.N  and Goldman Sachs  GS.N  can use their excess
capital to issue dividends and buybacks to shareholders.
    Under its annual "stress test" exercise established
following the 2007-2009 financial crisis, the Fed assesses how
banks' balance sheets would fare against a hypothetical severe
economic downturn. The results dictate how much capital banks
need to be healthy and how much they can return to shareholders.
    Banks must wait until after markets close at 4:30 p.m. EDT
(2030 GMT) on Monday to announce their capital distribution
plans. 
    While the 2022 scenarios were devised before Russia’s
invasion of Ukraine and the current hyper-inflationary outlook,
they should give investors and policymakers comfort that the
country's banks are well-prepared for what economists warn is a
potential U.S. recession later this year or next.
    The 34 banks suffered heavy losses in this year's scenario,
which saw the economy contract 3.5%, driven in part by a slump
in commerical real estate asset values, and the jobless rate
jumping to 10%. 
    But even then, the Fed said aggregate bank capital ratios
were still roughly twice the minimum amount required by
regulators.
    In 2020 the Fed changed how the test works, scrapping its
"pass-fail" model and introducing a more nuanced, bank-specific
capital regime.

 (Reporting by Pete Schroeder and Michelle Price, editing by
Deepa Babington)
 ((michelle.price@thomsonreuters.com; +12026041711; Twitter:
@michelleprice36;))