Federal Reserve revealed that all 23 of the American banks that participated in its annual stress test managed to keep lending to customers and businesses despite a severe recession scenario.
Despite $541 billion in expected losses for the group, the banks were able to maintain minimal capital levels and continue to lend to the economy during the fictitious recession, according to a statement from the Fed.
The annual stress test mandated by the Fed determines how much capital the sector can return to shareholders through buybacks and dividends. It was first implemented in the wake of the 2008 financial crisis, which was in part brought on by negligent banks. In the exam this year, the banks experienced a “serious worldwide recession,” which resulted in an increase in unemployment to 10%, a 40% reduction in the value of commercial real estate, and a 38% decline in housing prices.
With the failure of three midsized banks earlier this year, banks have come under increased scrutiny. Smaller banks, however, completely evade the Fed's criteria. The test looks at global banks with significant U.S. operations, giants like JPMorgan Chase and Wells Fargo, as well as the major regional competitors like PNC and Truist.
Hence, passing the stress test no longer signifies “all clear” as it did in prior years. More regulations on smaller banks are still anticipated in the upcoming months as a result of the recent failures, and stronger international standards are probably going to increase capital requirements for the nation's main banks.
“Today’s results confirm that the banking system remains strong and resilient,” Michael Barr, vice chair for supervision at the Fed, said in the release. “At the same time, this stress test is only one way to measure that strength. We should remain humble about how risks can arise and continue our work to ensure that banks are resilient to a range of economic scenarios, market shocks, and other stresses.”