Most US Banks Able to Weather Deep Recession

Last Updated: 8, March 2013

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U.S. banks have enough capital to withstand a severe economic downturn, the Federal Reserve said on Thursday, announcing that 17 out of 18 major banks had passed its annual stress test.

A stronger economy and banks’ efforts to boost their capital since the 2007-2009 U.S. financial crises helped all but one of the country’s 18 largest banks meet the minimum hurdle of a 5 percent capital buffer in the Fed’s annual “stress test.”

U.S. banks have enough capital to withstand a severe economic downturn, the Federal Reserve said on Thursday, announcing that 17 out of 18 major banks had passed its annual stress test.

The 18 banks, which a senior Fed official said represents more than 70 percent of total bank holding company assets in the U.S., were assessed on how they would withstand severe downturns not only in the United States but also in Europe and in Asian countries including China and Japan.

Another Fed official said the severely adverse scenario represents a financial calamity of greater magnitude than any two-year period in the last 100 years except for the Great Depression.

Under the stress tests’ most severe scenario, the United States would undergo a recession in which unemployment would reach nearly 12 percent, stocks would lose half their value and home prices would plunge 20 percent. The Fed said that under that crisis scenario, the 18 banks would suffer combined losses of $462 billion through the fourth quarter of 2014.

“The nation’s largest bank holding companies have continued to improve their ability to withstand an extremely adverse hypothetical economic scenario and are collectively in a much stronger capital position than before the financial crisis,” the U.S. central bank said in a statement.

Of the 18 banks, only the long-troubled Ally Financial, the auto finance lender once part of General Motors, failed to meet the minimum capital levels in the hypothetical scenario. In a statement, Ally disputed the Fed’s results and called the Fed’s analysis “inconsistent with historical experience” and “fundamentally flawed.”

“While Ally appreciates the Fed’s role in ensuring that financial institutions have adequate capital during stressed situations, using flawed assumptions could have lasting adverse impacts on the economy, including ultimately causing banks to reduce certain key lending categories,” the government-controlled bank said.

The 18 banks, along with hundreds of other U.S. banks, received federal bailouts during the financial crisis that struck in 2008 and triggered the worst economic downturn since the Great Depression of the 1930s.

The banking industry has been recovering steadily since then and U.S regulators have tried to minimise the odds of another taxpayer bailout, compelling banks to retain enough earnings and reinforce their buffers against potential losses.

But the Fed, which has conducted stress tests every year since 2009, emphasised that its latest projections “should not be interpreted as expected or likely outcomes for these firms, but rather as possible results under hypothetical” conditions.

Using the stress test results, the Fed will announce next week whether banks can start returning money to shareholders in the form of dividends or share buybacks.

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