WASHINGTON–The nation's largest bank holding companies have strong capital levels and retain their ability to lend to households and businesses during a severe recession, according to the results of supervisory stress tests released by the Federal Reserve Board.
Over the last eight years those same banks have added nearly three-quarters-of-a-trillion dollars in reserves.
The strong performance has those same banks saying it is time to dial back the regulations that were passed in the wake of the financial crisis.
According to the Federal Reserve, the most severe hypothetical scenario projects $383 billion in loan losses at the 34 participating bank holding companies during the nine quarters tested. The "severely adverse" scenario features a severe global recession with the U.S. unemployment rate rising by approximately 5.25% to 10%, accompanied by heightened stress in corporate loan markets and commercial real estate, the Fed said.
According to the Fed, under such a scenario, the firms' aggregate common equity tier 1 capital ratio, which compares high-quality capital to risk-weighted assets, would fall from an actual 12.5% in the fourth quarter of 2016 to a minimum level of 9.2% in the hypothetical stress scenario. Since 2009, the 34 firms have added more than $750 billion in common equity capital, the Fed said.
"This year's results show that, even during a severe recession, our large banks would remain well capitalized," Governor Jerome H. Powell said. "This would allow them to lend throughout the economic cycle, and support households and businesses when times are tough."
This is the seventh round of stress tests led by the Federal Reserve since 2009 and the fifth round required by the Dodd-Frank Act. The 34 bank holding companies tested—generally those with $50 billion or more in total consolidated assets--represent more than 75% of the assets of all domestic bank holding companies. The Federal Reserve uses its own independent projections of losses and incomes for each firm.
In addition to releasing results under the severely adverse hypothetical scenario, the board also released results from the "adverse" scenario, which features a moderate recession in the United States. In this scenario, the aggregate common equity capital ratio of the 34 firms fell from an actual 12.5% in the fourth quarter of 2016 to a minimum level of 10.7%.