Published: Fri, June 23, 2017
Finance | By Laverne Griffith

Fed stress tests show banks could withstand a deep downturn

Fed stress tests show banks could withstand a deep downturn

Even after being pounded by a severe economic downturn, banks collectively had a 9.2% capital buffer, staying well above the Fed's minimum of 4.5%.

"Today's results reaffirm that US banks are strong and remain well positioned to continue playing their important role in accelerating economic growth", said ABA President and CEO Rob Nichols.

Mr Powell said this week the Fed would be open to reasonable changes to the law, including the threshold for including banks in the stress tests.

Trump has promised to undo various restrictions on financial firms that were put into place after the 2008 financial crisis, including the 2010 Dodd-Frank Act.

Based on those results, the Fed allows or restrains those banks from offering a higher dividend, conducting share repurchases or making a major purchase. One is whether the banks have enough capital to survive economic turmoil in the financial system. The worst scenario "features a severe global recession with the US unemployment rate rising by approximately 5.25 percentage points to 10 percent, accompanied by heightened stress in corporate loan markets and commercial real estate", according to the Fed.

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BB&T projected having $5.4 billion in net revenue during the period and a loan-loss provision of $7.9 billion. That is much better than the 4.5 percent threshold that regulators demand, and an improvement on the 8.4 percent common equity tier 1 (CET1) capital ratio assessed previous year.

Regulators can reject a bank's capital plan for either reason. The Fed said the losses would reduce the banks' high-quality capital from 12.5 percent of its loans in the fourth quarter a year ago to 9.2 percent at the end of 2017.

The combined loan losses would be $383 billion. The Treasury Department issued a report last week proposing tests occur less frequently, that highly capitalized banks be exempt from the process and that one of the toughest hurdles be scrapped. The reviews have encouraged the 34 banks to add more than US$750 billion (S$1.04 trillion) in common equity capital since 2009, with a focus on safe and less profitable businesses.

For the third year in a row, all the banks maintained capital levels above the minimum the Fed requires. And by subjecting banks to the same model, the regulator might push them into businesses that turn out to be perilous, she said.

The tested banks included Bank of America, JP Morgan Chase, Wells Fargo, Morgan Chase and the Deutsche Bank Trust Corp, a U.S. unit of the troubled German financial giant.

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