Stress tests show that the largest banks are robust, says the Fed

The Federal Reserve said on Wednesday that the largest US banks were well-capitalized and prepared to withstand major shocks to economic and financial markets after subjecting them to a series of hypothetical disaster scenarios.

The banks’ regulator’s annual stress tests, which it began conducting after the 2008 financial crisis, showed they could withstand a 40 percent drop in commercial real estate prices and aggregate losses of more than half a trillion dollars without to fail.

The scenarios faced by the 23 largest banks included a severe economic recession, 10 percent unemployment and a sharp fall in house prices.

The aim of regulators was to determine whether banks held enough cash or equivalent instruments to cover sudden, unexpected losses. Once banks know whether regulators consider them sufficiently capitalized, they can decide how much money to return to shareholders through buybacks and dividends.

Senior Fed officials said Wednesday they did not expect the banks to announce plans to distribute cash to shareholders until Friday.

Something new this year: Regulators examined whether the eight banks most involved in trading stocks, bonds and other financial products could avoid a sudden panic in those markets and hinted that future stress tests could include similar scenarios, even if they do not contribute particularly to the capital requirements of banks.

“Today’s results confirm that the banking system remains strong and resilient,” said Michael S. Barr, the Fed’s vice chairman of oversight. “At the same time, this stress test is just one way to measure that strength. We must remain humble about how risk can arise and continue our work to ensure banks can withstand a range of economic scenarios, market shocks and other stresses.”

The tests produced another status report on the banking sector following this spring’s crisis, when four lenders, including Silicon Valley Bank, collapsed, casting doubt on the Fed’s ability to control them. While Wednesday’s results seemed to confirm what regulators had recently told Congress, namely that the banking system is safe and stable, they are unlikely to help resolve whether the Fed’s regulatory practices are strong enough.

The process of testing the banks for this year’s results began long before the banking crisis in the spring, and the scenarios that each bank was examined with were designed before the failures, so they did not represent any form of response to the crisis, said Fed officials. said. But they did have some of the same factors that brought down regional banks like First Republic Bank, including rising interest rates and falling commercial real estate values.

Fed regulators follow a set of rules introduced during the Trump administration that critics say have weakened supervision of banks to a certain extent — which are smaller than the too-big-to-fail giants, but larger than some regional and community banks. A sign of that reduced oversight was evident in Wednesday’s results: not all banks tested in 2022 were tested again in 2023.

Officials said on Wednesday they were reviewing stress testing rules along with other aspects of their banking supervision procedures to determine whether adjustments could be made to help prevent another crisis.