Major banks in the United States pass central bank stress test

The stress test is the Federal Reserve’s way of assessing whether the United States’ largest banks retain sufficient capital after periods of major economic downturn. The results also determine the minimum buffers banks must maintain.

The crisis scenarios the Fed uses vary each year. This year, the regulator is looking at what the effect of a rise in unemployment of more than 6 percentage points would mean for the balance sheets of banks. The central bank is also investigating what the consequences would be for banks if commercial real estate prices fell by 40 percent. For banks with a large trading arm, the Fed is also investigating how a shock to the international financial markets would play out.

This year, 31 banks were tested. That is much more than last year, when there were 24 banks. This is because every two years banks with a balance sheet total between 100 billion and 250 billion dollars are also discussed.

Risks with credit cards

“While the severity of this year’s stress test is similar to last year’s, the test resulted in larger losses due to riskier balance sheets and higher costs,” Barr said, adding that all banks have ample capital.

The higher risks are mainly for customers with credit cards and business loans. In addition, higher costs mean less profit from commissions, for example, which, according to the Fed, makes it more difficult to compensate for losses.

An important indicator for banks, the CET1 capital ratio, was tested this year at 9.9 percent. That was 12.7 percent a year earlier. The minimum requirement is 4.5 percent.

The annual stress test was introduced in the aftermath of the major financial crisis that led to major concerns about the survival of banks between 2007 and 2009. By regularly checking whether the buffers were strong enough, the Fed wanted to restore confidence.