The Fed’s stress test for banks, which is one of the topics followed by global markets recently, has been completed. The test showed that the major US banks could survive a severe recession.
The US Federal Reserve reported that the major banks it stress-tested are well-positioned to weather a severe recession and can continue to lend to households and businesses even during a recession.
The Fed has announced the results of its annual stress test, which is subjected to 23 major US banks, including JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Morgan Stanley and Goldman Sachs.
All of the banks tested were able to maintain minimum capital levels during a recession despite an estimated $541 billion in losses, the bank said in a statement.
In the statement, it was noted that the ratio of total equity, which provides a buffer against losses under stress, is expected to decrease by 2.3 percentage points to a minimum of 10.1 percent.
Stress test is one of the tools that help large banks to support the economy during economic downturns, and the test evaluates the resilience of banks by estimating their capital levels, losses, income and expenses under hypothetical recession and financial market shock scenarios, based on last year’s data.
The scenarios based on assumptions in this year’s stress test include a severe global recession with a 40 percent fall in commercial real estate prices, a significant increase in the job gap and a 38 percent drop in housing prices, the statement said. In the statement, it was noted that the scenario predicts that the unemployment rate will reach a peak of 10 percent with an increase of 6.4 points and that the economic output will decrease proportionally.
In the statement, it was stated that banks were also tested against greater inflationary pressures and increasing interest rates, and the results showed that large banks were resistant to the rising interest rate environment.