economy and politics

US banks have capital to withstand economic turbulence

US banks have capital to withstand economic turbulence

Specifically, the Fed concluded that the levels of high quality capital of the banks would descend to 9.9% at their lowest levels, which represents more than double the regulatory minimum.

The relatively good health clears the way for banks to announce capital plans to shareholders in the coming days, including share buybacks and dividends. According to a senior Fed official, banks will be able to announce their capital plans after the market closes on Friday.

However, the test revealed that banks suffered steeper losses this year, and not because the test was tougher. The 2024 version of the stress test was very similar to last year, and the Fed said the biggest losses were due to how banks’ portfolios have changed over the past year.

The Fed noted rising credit card balances and delinquency rates, riskier corporate loan portfolios and lower expected profits will weigh on banks this year.

“It’s not changes in the scenario that drive results. Rather, the three main factors driving this year’s results were associated with changes in banks’ balance sheets,” said Fed Vice Chairman of Supervision Michael Barr, in a statement.

The banks that underwent the test would suffer combined losses of $685 billion in a hypothetical severe scenario. On average, banks saw their capital ratios fall by 2.8 percentage points, the steepest drop since 2018.

Of the banks that underwent the test, Charles Schwab Corp reported the highest capital levels under the test, recording a capital ratio of 25.2% in that severe scenario. Bank of New York Mellon Corp, JPMorgan Chase, Morgan Stanley, Northern Trust and State Street reported double-digit capital ratios after the test, as did the U.S. operations of Deutsche Bank and UBS.

The world’s largest banks recorded capital ratios well above the minimums, with JPMorgan recording the highest, at 12.5%, and Wells Fargo the lowest, at 8.1%. Bank of America recorded a capital ratio of 9.1% and Citigroup 9.7%.

Although banks were expected to do well in this year’s exam, as in previous years, the annual results are significant for each company, as their performance determines the amount of capital they must maintain against possible losses. Excess funds above those capital levels can be returned to shareholders.



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