US banks would lose $410bn if there were another severe global recession, but would maintain enough capital to keep lending to companies and individuals, according to US regulators.
Eighteen of the country’s largest banks all passed the first round of their annual stress tests on Friday, as Federal Reserve figures showed the US financial services industry is well-enough capitalised to weather a worst-case-scenario economic downturn.
The results will allow banks to continue making record dividend payouts, as long as they also pass a second round of tests next week, when the Fed will make a qualitative assessment of their capital plans.
Randal Quarles, the vice-chairman of the Fed in charge of banking oversight, said on Friday: “The results confirm that our financial system remains resilient. The nation’s largest banks are significantly stronger than before the crisis and would be well-positioned to support the economy even after a severe shock.”
Across the sector, the average common equity tier one capital ratio (CET1), a measure of financial strength, would fall to a low point of 9.2 per cent in a severe recession, compared to 12.3 per cent at the end of last year, according to the Fed calculations. The Fed sets a minimum CET1 ratio for each institution of 4.5 per cent.
The company that came closest to breaching the Fed-mandated minimum in the stress scenario was Capital One, whose CET1 ratio was forecast to fall to 6 per cent in the theoretical downturn. Fed officials said this was largely a result of changes made to their forecast model which means credit card losses are now presumed to be larger than they have been in previous years’ tests.
Last year, Goldman Sachs and Morgan Stanley both came close to breaching the Fed’s minimum ratios, but both fared better this year. The pair have improved their balance sheets over the past 12 months and changes to the Fed’s stress test model this year — which now imagines equities falling less and US Treasuries prices rising more — benefit the banks’ trading arms.
This year, Goldman Sachs’ tier one capital equity ratio is forecast to fall as low as 7.6 per cent, well above the Fed-mandated 4.5 per cent, in the worst-case scenario. That of Morgan Stanley is shown to drop to 8.9 per cent.
This year was the first in which many medium-sized banks were exempt. Under changes enacted earlier this year, banks including Ally, BB&T and SunTrust are now only required to face stress tests once every two years.