The Federal Reserve said Thursday that all of the 34 largest US banks are fortified enough to withstand a severe USA and global recession and continue lending. "This would allow them to lend throughout the economic cycle, and support households and businesses when times are tough". Stress tests are simulations regulators run to gauge a bank's ability to weather a downturn.
"This year's results show that, even during a severe recession, our large banks would remain well capitalized", said Fed Governor Jerome Powell.
That means even if a bank passed past year, there's no guarantee it will do so again. Wall Street banks have fought Volcker vigorously, saying it is overly complicated and hurts market liquidity.
"Today's results reaffirm that U.S. banks are strong and remain well positioned to continue playing their important role in accelerating economic growth", the group said.
Regulatory advocate Marcus Stanley says these stress tests have created a banking system less susceptible to crisis but, "If these stress tests are weakened in the future, they are going to become significantly less reliable".
The regulators, which include the Federal Reserve and Federal Deposit Insurance Corp., mapped out how Congress and regulators could tailor regulations on smaller banks to help spur economic growth. The Fed will release those results Wednesday.
Each year, regulators tweak the exam to keep banks on their toes.
The biggest United States banks' own estimates for loan losses were more optimistic than the Fed's - a trend that has arisen in past years as well.
Strong numbers show banks have learned how to position their portfolios to pass tests, and not necessarily lend as much as possible, said Karen Shaw Petrou, managing partner at Federal Financial Analytics Inc. That is much better than the 4.5 percent threshold that regulators demand, and an improvement on the 8.4 percent common equity tier 1 (CET1) capital ratio assessed a year ago.
But for the most part, the stress tests have been getting less stressful. The banks undergoing the seventh annual check-up included JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc. and Wells Fargo and Co. - the four biggest US banks by assets.
"If the Fed bets wrong and treats one particular trading strategy as low risk and it's high risk, all the banks will have taken that low-risk bet and it will have turned out very badly", she said. The 9.2 percent level shows improvement from last year's 8.4 percent.
Citigroup performed the best with a tier 1 capital ratio of 9.7 per cent. Ally Financial and KeyCorp were both below seven per cent.
Of those, Goldman Sachs had the biggest optimism gap compared with the Fed when it came to the worst-case scenario. Wells Fargo's metric also fared better in its own test than under the Fed's, by 0.8 of a point.