The Fed maintains that banks can comfortably weather a severe recession

America’s largest banks would remain well capitalized in the event of a severe economic shock, the Federal Reserve said on Thursday after the annual health check of financial institutions, paving the way for them to issue share buybacks and dividends.

The 34 supervised by the Fed with more than $100 billion in assets would suffer combined losses of $612 billion in a hypothetical severe recession, the central bank said, but that would leave them with about twice the amount of capital required under their rules.

As a result, banks including JPMorgan Chase JPM.N, Bank of America BAC.N, Wells Fargo WFC.N, Citigroup CN, Morgan Stanley MS.N, and Goldman Sachs GS.N can use their excess capital to issue dividends and shareholder buybacks.

Under its annual “stress test” exercise established after the 2007-2009 financial crisis, the Fed assesses how banks’ balance sheets would fare in the face of a hypothetical severe economic downturn. The results dictate how much capital they need to be healthy and how much they can return to shareholders.

Banks must wait until the markets close at 2030 GMT on Monday to announce their capital distribution plans.

Although the 2022 scenarios were designed before the invasion of Ukraine by Russia and the current hyperinflationary outlook, should reassure investors and monetary authorities that the country’s banks are well prepared for what economists warn is a possible recession in the country later this year or next. .

All 34 banks suffered heavy losses in the scenario in which the economy contracted 3.5% this year, fueled in part by a drop in commercial real estate asset values, and the unemployment rate jumped to 10%.

But even then, the Fed said aggregate bank capital ratios were still roughly double the minimum amount required by regulators.

In 2020, the Fed changed the way the test works, scrapping its “pass-fail” model and introducing a more nuanced and bank-specific capital regime.

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