The largest US banks are “strongly capitalized” and would survive a severe global economic recession, the US Federal Reserve said on Thursday.
So-called stress testing by the central bank showed that in the event of pronounced economic troubles — in which unemployment shot up to 10 percent, GDP shrank and financial conditions worsened — the nation’s 35 biggest financial institutions would still be able to lend to households and businesses.
However, certain changes in a sweeping tax overhaul in December last year and a harsher hypothetical scenario led to much steeper projected losses than were calculated last year, the central bank said in a statement.
Randal Quarles, who was appointed vice chairman for banking supervision at the Fed, said the testing showed that banks would end the next recession in better shape than they started the last one.
“Despite a tough scenario and other factors that affected this year’s test, the capital levels of the firms after the hypothetical severe global recession are higher than the actual capital levels of large banks in the years leading up to the most recent recession,” Quarles said.
The tests also showed that the ratio of capital, which allows lenders to absorb losses, to risk-weighted assets would drop from 12.3 percent at the end of last year to 7.9 percent — weaker than 9.2 percent calculated a year earlier.
Projected losses for the 35 banks amounted to US$578 billion over nine quarters, up sharply from the US$383 billion in losses for 34 banks calculated last year.
The higher projected losses reflected that December’s sweeping corporate tax cuts resulted in one-time accounting-related charges and also removed some benefits banks had relied on during prior recessions, officials said.
The scenario also envisioned a deeper economic shock than the prior round of tests, they added.
Together the 35 banks account for 80 percent of all the assets of banks operating in the US.
The stress tests were required under the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act enacted in the wake of the global financial crisis.
US President Donald Trump last month signed a rollback of Dodd-Frank regulations, freeing small and medium-sized banks from the law’s stress-test requirements, among other changes.
Dodd-Frank’s strictures had restricted lending, suppressing economic growth, Trump said at the time.
However, the US Federal Deposit Insurance Corp last month said that the US banking sector, small community lenders as well as major financial institutions, just had their most profitable quarter ever.
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