Michael Barr, Vice Chair for Supervision on the Federal Reserve, testifies about recent bank failures during a US Senate Committee on Banking, House and Urban Affairs hearing on Capitol Hill in Washington, DC, May 18, 2023.
Saul Loeb | AFP | Getty Images
All 23 of the U.S. banks included within the Federal Reserve’s annual stress test weathered a severe recession scenario while continuing to lend to consumers and corporations, the regulator said Wednesday.
The banks were able to keep up minimum capital levels, despite $541 billion in projected losses for the group, while continuing to offer credit to the economy within the hypothetical recession, the Fed said in a release.
Begun within the aftermath of the 2008 financial crisis, which was caused partly by irresponsible banks, the Fed’s annual stress test dictates how much capital the industry can return to shareholders via buybacks and dividends. On this 12 months’s exam, the banks underwent a “severe global recession” with unemployment surging to 10%, a 40% decline in business real estate values and a 38% drop in housing prices.
Banks are the main focus of heightened scrutiny within the weeks following the collapse of three midsized banks earlier this 12 months. But smaller banks avoid the Fed’s test entirely. The test examines giants including JPMorgan Chase and Wells Fargo, international banks with large U.S. operations, and the largest regional players including PNC and Truist.
In consequence, clearing the stress test hurdle is not the “all clear” signal its been in previous years. Still expected in coming months are increased regulations on regional banks due to the recent failures, in addition to tighter international standards more likely to boost capital requirements for the country’s largest banks.
“Today’s results confirm that the banking system stays strong and resilient,” Michael Barr, vice chair for supervision on the Fed, said in the discharge. “At the identical time, this stress test is just one technique to measure that strength. We must always remain humble about how risks can arise and proceed our work to be certain that banks are resilient to a spread of economic scenarios, market shocks, and other stresses.”
Goldman’s bank card losses
Losses on loans made up 78% of the $541 billion in projected losses, with most of the remainder coming from trading losses at Wall Street firms, the Fed said. The speed of total loan losses varied considerably across the banks, from a low of 1.3% at Charles Schwab to 14.7% at Capital One.
Bank cards were easily essentially the most problematic loan product within the exam. The common loss rate for cards within the group was 17.4%; the next-worst average loss rate was for business real estate loans at 8.8%.
Amongst card lenders, Goldman Sachs‘ portfolio posted an almost 25% loss rate within the hypothetical downturn — the best for any single loan category across the 23 banks— followed by Capital One’s 22% rate. Mounting losses in Goldman’s consumer division in recent times, driven by provisioning for credit-card loans, forced CEO David Solomon to pivot away from his retail banking strategy.
Regional banks pinched?
The group saw their total capital levels drop from 12.4% to 10.1% in the course of the hypothetical recession. But that average obscured larger hits to capital — which provides a cushion for loan losses — seen at banks which have greater exposure to business real estate and credit-card loans.
Regional banks including U.S. Bank, Truist, Residents, M&T and card-centric Capital One had the bottom stressed capital levels within the exam, hovering between 6% and eight%. While still above current standards, those relatively low levels might be an element if coming regulation forces the industry to carry higher levels of capital.
Big banks generally performed higher than regional and card-centric firms, Jefferies analyst Ken Usdin wrote Wednesday in a research note. Capital One, Citigroup, Residents and Truist could see the largest increases in required capital buffers after the exam, he wrote.
Banks are expected to reveal updated plans for buybacks and dividends Friday after the close of standard trading. Given uncertainties about upcoming regulation and the risks of an actual recession arriving in the following 12 months, analysts have said banks are more likely to be relatively conservative with their capital plans.