‘Large US banks have strong capital levels after 2nd round of stress test’
The US Federal Reserve Board has released a second round of bank stress test results this year, which showed that large banks had strong capital levels under two separate hypothetical scenarios with severe global recession.
The first scenario featured an unemployment rate that spiked to 12.5 per cent and then declined to about 7.5 per cent, while the second scenario included a peak unemployment rate of 11 per cent followed by a more modest decline to 9 per cent, Xinhua news agency reported citing the test results as saying on Friday.
Under both scenarios, large banks would collectively have more than $600 billion in total losses, considerably higher than the first round of stress test conducted earlier this year.
However, their capital ratios would decline from an average starting point of 12.2 per cent to 9.6 per cent in the more severe scenario, well above the 4.5 per cent minimum, the Fed said.
“The banking system has been a source of strength during the past year and today’s stress test results confirm that large banks could continue to lend to households and businesses even during a sharply adverse future turn in the economy,” Fed Vice Chair for Supervision Randal Quarles said in a statement.
Since 2009, the Fed has used the annual stress tests to measure large US banks’ ability to respond to severe economic and market turbulence.
If a bank’s capital is found to be inadequate, the central bank can block it from buying bank shares or paying dividends.
Earlier this year, the Fed conducted its annual stress test and additional analysis in the wake of the Covid-19 pandemic.
Those results found that banks generally had strong levels of capital, but considerable economic uncertainty remained.
Then the Fed placed restrictions on large banks’ dividend payments and share buybacks.
For the first quarter of 2021, both dividends and share re-purchases will be limited to an amount based on income over the past year, according to the Fed’s modified restrictions on large banks released Friday.