Bank of America shows financial health with latest round of Fed stress tests

On Thursday, the Federal Reserve gave all 33 of the largest U.S. banks a pass rating in its annual stress test, which measures each bank’s ability to withstand a severe recession.

in a series of post-apocalyptic scenarios FedThe Fed said banks would collectively lose $612 billion and the group’s capital ratio would fall to 9.7%, more than double the minimum required.

This bankThe U.S. subsidiaries of foreign banks including JPMorgan and Goldman Sachs, as well as Credit Suisse, must demonstrate that their capital levels remain above government-mandated minimums after going through a scenario outlined by the Federal Reserve in February.

The result is a nod to the financial strength of the largest U.S. banks, some of which are classified by regulators as systemically important to the economy.

Credit Suisse’s U.S. unit suffered the biggest capital hit in the stress test, with its Common Equity Tier 1, or CET1, capital ratio falling nearly 8 percentage points, followed by HSBC and Goldman Sachs.

Most of the assumed losses come from $450 billion in loan losses and $100 billion in trade and counterparty losses. Compared with last year’s stress test, banks reported more than $50 billion in additional losses, taking a bigger hit to capital reserves.

“This year’s hypothetical scenario is, by design, more difficult than the 2021 test, including a severe global recession and significant pressure on commercial real estate and corporate debt markets,” the Fed said in a statement. Capital accumulation since the global financial crisis.

The passing score expected by analysts comes amid growing concerns. impending recession. Federal Reserve Chairman Jay Powell acknowledged this week that a U.S. recession is “certainly possible” as the Fed faces its fastest inflation in about 40 years.

The stress-test scenario included a nearly 40% drop in commercial real estate prices, a 55% drop in stock prices, more stress in the corporate debt market and an unemployment rate of 10% — a crisis that is far worse than economists expect next year.

The results of the annual tests required by post-crisis Dodd-Frank financial regulations will help determine each bank’s so-called stress-test capital buffers. This is the amount of CET1 capital they must hold, relative to their risk-weighted assets, above the regulatory minimum.

The stressed capital buffer is a combination of the largest loss of CET1 capital during the stress test and the bank’s plan to return capital to shareholders through dividends and buybacks over the next 12 months.

Banks will be able to publicly confirm their stressed capital buffers from Monday, when they may also disclose their shareholder return plans.

Analysts expect dividends While they forecast a slowdown in the pace of share buybacks by the big banks, they will increase this year.

The Fed has come under fire in recent years for changes to its stress tests that critics say make it easier for financial institutions to play around with them. Under Randal Quarles, a former Fed supervisory vice chair who stepped down in November, the test has become more transparent and the central bank can no longer publicly fail based on a qualitative assessment of an institution’s underlying strength.

Former senior Treasury official Michael Barr is Awaiting Senate confirmation Fill Quarles’ vacant position.

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