The Federal Reserve's annual stress test found that all 23 U.S. banks maintained their lending to both consumers and businesses even through a hypothetical severe recession. There was notable variation in the projected total loan losses, with Charles Schwab showing the least at 1.3% and Capital One experiencing the most at 14.7%; credit cards were the most vulnerable loan product. On Friday, after the close of the stock market, banks like JPMorgan Chase and Wells Fargo will announce their updated plans for stock buybacks and dividends.
The Federal Reserve reported on Wednesday that the 23 U.S. banks subjected to its annual stress test withstood a severe recession situation while still providing loans to consumers and corporations. Despite anticipated losses of $541 billion for the group, the banks were able to maintain minimum capital levels and keep lending during the hypothetical recession, according to a statement.Starting after the 2008 financial crisis that was to some extent due to irresponsible banking, the Fed's annual stress test establishes how much capital the industry can repurchase and share with shareholders. This year's exam featured a "severe global recession" with a 10% unemployment rate, a 40% decrease in commercial real estate values, and a 38% slump in housing prices.In the wake of the collapse of three midsized banks this year, banks have come into close scrutiny. However, smaller banks don't need to participate in the Fed's test at all. Participants comprise of huge firms such as JPMorgan Chase and Wells Fargo, international banks with extensive U.S. activities, and major regional banks including PNC and Truist.Consequently, passing the stress test is not the same "all clear" signal it has been in the past. It remains likely in the upcoming months that regional banks will be faced with stronger regulations due to the earlier failures, as well as tighter international standards which will almost certainly lead to bigger capital requirements for the largest U.S. banks. "The results from today affirm that the banking system is still strong and resilient," Michael Barr, the Fed's Vice Chair for Supervision, said in the release. "However, we should stay humble when it comes to the potential risks that may arise and keep working to make sure that banks can handle any kind of market or economic pressures."
The Fed estimated $541 billion in potential losses, with 78% of that coming from credit-related loans and the rest stemming from Wall Street trading losses. The rate of loan losses varied significantly among the banks, from a minimum of 1.3% (Charles Schwab) to 14.7% (Capital One). Credit cards were the most problematic loan product, with an average loss rate of 17.4%, followed by commercial real estate (8.8%). In the group of 23 banks, Goldman Sachs saw the highest single loss rate (25%) for any loan category, while Capital One had the second-highest (22%). Recent mounting losses in Goldman's consumer division, largely driven by its credit-card loans, have caused CEO David Solomon to consider an alternate retail banking strategy.
The group observed a decrease in their total capital ratios from 12.4% to 10.1% during the hypothetical recession. With that said, the average figure concealed larger drops in capital -- which works as a buffer against loan losses -- experienced at banks which have a higher degree of exposure to commercial real estate and credit-card loans. Banks such as U.S. Bank, Truist, Citizens, M&T and mostly card-based Capital One had the lowest stressed capital levels in the exam, ranging between 6 and 8%. Although these ratios were still above current required standards, their comparably low figures could be a deciding factor if upcoming regulation necessitates the industry to have a higher level of capital. According to Jefferies analyst Ken Usdin, in a Wednesday research note, larger banks typically fared better than regional and card-centric firms. The biggest required capital buffer increases after the exam, Usdin wrote, would most likely affect Capital One, Citigroup, Citizens and Truist. On Friday, when trading closes, financial institutions are expected to report renewed plans for dividends and stock buybacks. Concerning the exigencies of future regulation and the potential for a real recession to manifest in the upcoming year, analysts have suggested that banks would be prudent in handling their capital plans.
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