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All 31 of America’s biggest banks passed the Federal Reserve’s annual so-called stress tests, satisfying regulators that they could withstand a theoretical scenario where unemployment rose to 10 percent during a severe recession.
The Fed said on Wednesday that under its baseline scenario, banks including JPMorgan Chase, Goldman Sachs and Bank of America would lose nearly $685 billion and take the biggest hit to capital in six years, but still meet minimum regulatory standards.
The scenario assumed a 40 percent drop in commercial real estate prices, a substantial increase in office vacancies and a 36 percent drop in real estate prices.
“This year’s stress test shows that large banks have sufficient capital to withstand a high-stress scenario and meet their minimum capital ratios,” said Michael Barr, the Fed’s vice chairman for supervision.
“The aim of our test is to help ensure that banks have enough capital to absorb losses in a high-stress scenario,” he added.
The tests are used to calculate the minimum amount of capital used to absorb losses that banks must hold in proportion to their assets.
Banks, which often use the results of the test to inform investors about potential shareholder payouts, will provide an update on Friday afternoon on what they expect their new capital requirement to be.
Barclays research analyst Jason Goldberg estimated that several big banks, including Goldman and BofA, will see their capital requirements rise by more than analysts had expected, potentially leaving less capital for potential dividends and buybacks.
Shares of Goldman fell 1.7 percent in after-hours trading, while shares of BofA fell 0.3 percent.
The annual exercise began after the 2008 financial crisis and was seen as a major factor in restoring confidence in the banking sector. In recent years, the largest national banks have generally passed the tests, usually by wide margins, raising questions about their utility and purpose.
Matthew Bisanz, a partner in the financial services practice at law firm Mayer Brown, said relying on capital buffers in the tests “focuses people on the wrong things.”
“Last year in March [2023]“We saw three banks wiped out in one month,” he said, referring to the failures of Silicon Valley Bank, First Republic Bank and Signature Bank. “Yet all 31 of these banks will survive a stress event that lasts nine quarters. This just confirms how unrealistic the stress test is.”
The results come amid renewed focus on capital levels at major U.S. banks as regulators consider changes to their proposal to implement the so-called Basel III Endgame capital rules.
The Fed’s original proposal, which called for a significant increase in capital requirements, prompted an aggressive lobbying effort by major U.S. banks. Fed chief Jay Powell has since said he is likely to make substantial changes to the proposed new rules.
This year’s stress tests would push banks’ aggregate Tier 1 capital, their main buffer against losses, down by 2.8 percentage points, the biggest drop since 2018.
The Fed said the larger losses were partly due to expectations of higher credit card loan losses for the nation’s largest banks, up nearly 20 percent from a year ago. Banks’ corporate loan books also became riskier as higher spending and lower fees left lenders with less of a cushion to absorb a serious hit.
Another scenario examining what would happen if the big five hedge funds failed showed that the biggest and most complex banks have significant exposure and are projected to lose between $13 billion and $22 billion in aggregate.
More reporting from Stephen Gandel in New York