(22 June 2018 – Global) US banks are set to allocate greater capital to investment, dividends and share buybacks after the largest 35 institutions successfully passed the first stage of the Federal Reserve’s annual regulatory stress test.
The result confirms domestic US banks and subsidiaries of international banks display strong enough capital adequacy to cope with a long running and deep recession with extreme conditions of unemployment, negative economic growth and many other variables. This year the test features a severe global recession with unemployment rising by 6 percentage points to 10 percent and a significantly steeper Treasury yield curve.
Although banks would undergo US$578 billion in total losses in the Federal Reserve’s most severe scenario applied since testing commenced in the wake of the 2007 Global Financial Crisis, their level of high-quality capital would be greater than the threshold regulators demand and notably exceed levels seen immediately leading up to the 2007 crisis according to Federal Reserve representatives. “This is the mathematical calculation that shows there are robust levels of capital for most firms. Next week will be the judgment” quoted Mike Alix, financial services risk leader at PwC.
The first round results will be supplemented a second round of testing which includes operational factors like risk management, indicating whether US banks would meet minimum requirements under the Federal Reserve’s methodology using self-reported materials. The second round of stress testing results will determine whether the Federal Reserve approves capital plans. Banks now have an opportunity to resubmit those plans if they find their own projections were much sunnier than the Fed’s. Since the first test in 2009, banks have seen losses abate, loan portfolios improve and profits grow. US subsidiaries of six foreign lenders, including Deutsche Bank, Credit Suisse Group AG and UBS Group AG, also go through the test and had their results publicly released for the first time. Deutsche Bank, whose U.S. operations have been under intense regulatory scrutiny, also easily met all the minimum capital requirements, as did Credit Suisse and UBS, the results showed. Other banks tested include JPMorgan, Citigroup, BAML and Wells Fargo, as well as major regional lenders like Capital One, PNC Financial Services Group Inc and U.S. Bancorp and Wall Street banks Goldman Sachs and Morgan Stanley.