Fed: Biggest US banks strong enough to withstand recession

Morgan Stanley Barclays Goldman Sachs JPMorgan Credit Suisse Citigroup and Bank of America Merrill Lynch from Reuters archive

"In terms of reducing the regulatory burden, the biggest bang for the buck is to reduce the burden on smaller financial institutions", said FDIC Chairman Martin Gruenberg during a Senate Banking Committee hearing. In the second, losses were $322 billion. Fed examiners estimated that a quarter fewer of Citi's loans would go bad in a recession than they did four years ago. Its trading losses, too, would more than double.

The banks all passed the capital requirements required by the tests, even the most stringent test which involved a hypothetical doubling of the unemployment rate. The 9.2 percent level shows improvement from last year's 8.4 percent. That's still a passing grade, but not an impressive one.

Bank of America Corp. would suffer a $26.4 billion hit to its pretax profit under that scenario, the most of any lender. But these annual report cards may become less stressful and less frequent. Both Mr. Powell and Mr. Noreika also suggested exempting community banks from Volcker and reducing the number of banks that are subject to stress tests. Specifically, the tests will feature a sample portfolio to show how certain assets would be affected by the Fed's invented crisis, he said. Also true, the Fed has been applying less pressure. Key in that will be Volcker, which restricts banks from making speculative market bets with their own capital and investing in certain funds.

"This year's results show that, even during a severe recession, our large banks would remain well capitalised", governor Jerome H. Powell said.

Morgan Stanley had the lowest level at 3.8 percent, while Goldman was next at 4.1 percent and State Street had a projected 4.2 percent level.

It's not just capital ratios. That's down from $526 billion in losses for 33 banks previous year. It must be the computers. "They just can't get any money because the banks just won't let them borrow it because of the rules and regulations in Dodd-Frank". The Fed estimated they would bring in $30 billion more in net revenue in a recession than they did in the test a year ago.




There is an important exception to this, though, as the the Fed can still reject a bank's capital plan due to qualitative factors brought to its notice.

Under the Fed's worst-case stress test scenario, the US unemployment rate more than doubles to 10 percent. Some of the better results may make sense. So you would expect lower lending losses there. And not every part of the test was easier.

The firms reviewed included Bank of America, JP Morgan Chase and Wells Fargo.

"T$3 he Trump administration will likely use the findings to support its push for deregulation", said Cap Alpha analyst Ian Katz, according to Politico.

However, KBW concedes that after seeing the test results, its estimates may be too optimistic for some banks.

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