Fed “Test” For Banks Reaches The Final Mark

Last Wednesday, the Federal Reserve announced that the 23 banks included in its annual stress test all endured a severe recession scenario while continuing to lend to both corporations and consumers, CNBC reported.

The Fed’s annual stress test, which began after the 2008 banking crisis, dictates the capital the financial industry can provide to shareholders through dividends and buybacks.

In this year’s stress test, banks faced a “severe global recession” that included 10 percent unemployment, a 38 percent drop in home prices, and a 40 percent drop in the value of commercial real estate.

According to the press release from the Fed, in a hypothetical recession, all 23 banks were able to maintain a minimum capital level despite projected losses of $541 billion while continuing to extend credit to the economy.

Following the collapse of three mid-sized banks earlier this year, the US banks became the focus of heightened scrutiny. However, smaller banks avoid the annual stress test entirely.

Instead, the Fed’s test examines large banks like Wells Fargo or JPMorgan Chase and large regional banks like Truist and PNC, as well as international banks that have large US operations.

Clearing this year’s stress test, however, is not the “all clear” sign that it has been in previous years. In the coming months, increased regulations on regional banks are expected due to the recent bank failures. Additionally, tighter international standards could boost capital requirements for the largest US banks.

Michael Barr, vice chair for supervision at the Federal Reserve said in the press release that the annual stress test is just one way for the central bank to measure the strength of the US banking system.

At the same time, Barr said it was vital to remain aware of the risks that can arise and the Fed will continue working to ensure that US banks remain resilient to various scenarios affecting the economy.