All of the nation's 31 largest banks are adequately fortified to withstand a severe US and global recession and keep lending, the Federal Reserve said yesterday. Results of the Fed's annual "stress tests" show that as a group, the 31 banks are stronger than at any time since the 2008 financial crisis struck, thanks to a steadily recovering economy. However, industry analysts say the most critical tests for the industry will come next week when the Fed will announce whether it's approved each bank's request—if one has been made—to raise dividends or repurchase shares. Those results will be based on how each bank would fare in a severe recession if it took such steps. The banks undergoing the stress tests included JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc., and Wells Fargo and Co., the four biggest US banks by assets.
The Fed has conducted stress tests, designed to restore badly shaken confidence in the US financial system, of the largest banks since 2009. Under the stress tests' hypothetical "severely adverse" scenario, the US would endure a catastrophic recession in which unemployment reached 10%, home prices sank 25%, the stock market plunged nearly 60%, and market volatility rose sharply. The tests compare losses projected for each bank with its capital (the cushion it holds against losses). The Fed said that under that scenario, the 31 banks would suffer combined loan losses of $340 billion, reducing capital from 11.9% of their loans as of the third quarter last year to 8.2% at the end of 2016—far above the 5.5% the banks held at the start of 2009, soon after the financial crisis hit. One independent banking analyst says the tests may have "become too predictable," but he adds that "banks are a reflection of the economy they serve, and the US economy is in pretty good shape." (Read more banks stories.)