Banks Pass Fed’s Stress Test

We all have stress in our lives. But according to the Federal Reserve’s annual stress test results, the largest U.S. Banks shouldn’t be one of them. 👍

This test aims to help ensure that large banks can lend to households and businesses even in a severe recession. They were implemented under the Dodd-Frank Act, a response to the 2008 financial crisis that saw the global property market implode and credit markets freeze.

As part of the analysis, regulators create three projected macroeconomic scenarios, a baseline, an adverse, and a severely adverse scenario. They then run the test and share that information to help everybody involved make more informed business and regulatory decisions. 📊

This year’s severely adverse scenario included the following characteristics:

  • A severe global recession
  • U.S. unemployment rising to a peak of 10% in Q3 2024
  • Heightened stress in commercial and residential real estate markets and corporate debt markets
  • A sharp increase in market volatility, widening corporate bond spreads, and a collapse in asset prices
  • Recessions in four countries or country blocs, stress in advanced economies, and a rising U.S. Dollar

Despite these aggressive projections and more, all 23 U.S. banks tested could maintain minimum capital levels. However, that doesn’t mean they were left unscathed. The group’s projected losses topped $541 billion, but they were still able to provide credit to the economy. 💵

While this is undoubtedly positive news, it only covers the largest banks in the U.S.

Although these systemically important global banks have received much regulatory scrutiny and reform since the last financial crisis, the same can’t be said for regional and community banks. That’s likely to change in the months ahead as regulators assess the recent collapses of Silicon Valley Bank, Signature Bank, and First Republic Bank and monitor the health of the sectors’ other major players. 🕵️

Now that these results are out, Wall Street anticipates banks will disclose their updated buyback and dividend plans on Friday after the closing bell. Given this year’s events and the potential regulatory implications, most expect banks to remain conservative with their capital plans. 🤷

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