Fed's Stress Tests: Biggest US Banks Declared Healthy

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The 34 largest banks in the USA have money on hand to withstand a severe recession, the U.S. central bank said on Thursday.

"The nation's largest bank holding companies have strong capital levels and retain their ability to lend to households and businesses during a severe recession", said the Fed in a statement on Thursday.

Since 2009, the 34 firms have added more than $750bn in common equity capital, the Federal Reserve said.

The most severe hypothetical scenario imposed by the Fed supposed a global economic downturn even worse than the recent Great Recession.

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The latest downturn scenario includes: the USA unemployment rate peaking at 10 percent in the third quarter of 2018 - up from 4.3 percent in May; a 49.7 percent decline in the Dow Jones Industrial Average; a decline in home prices of 25.7 percent and a 34 percent decline in commercial real-estate prices, both between now and December 31, 2018; an increase in 30-year mortgage rates to 4.6 percent; and an inflation rate of 1.4 percent in 2017 and 1.8 percent in 2018.

The Federal Reserve says all of the country's big banks passed this year's stress test, in which regulators create a scenario where unemployment surges and banks lose hundreds of billions of dollars in loans.

The Fed's assessment showed the other five largest banks - JPMorgan, Bank of America, Wells Fargo & Co (WFC.N), Goldman Sachs Group Inc (GS.N) and Morgan Stanley (MS.N) - having minimum CET1 ratios between 8.4 and 9.4 percent. 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.

Next Wednesday, investors will watch as the Fed announces the results of the Comprehensive Capital Analysis and Review, which determines how much money Wall Street banks can devote to dividends and stock buybacks during the next year. Last year, during a second phase examining proposals to pay out capital to shareholders, the bank was forced to resubmit its plan to address a "material weakness".

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Thursday's results also presented the outcome of a less severe "adverse" scenario in which participants' capital ratios only fell to 10.7 per cent.

The finding comes from an annual "stress test" conducted by the Federal Reserve.

A Fed official said Thursday that the results show the industry is well-capitalized and credited the reforms with boosting lending for banks.

"From this solid foundation, the focus should now turn to what can be done to help United States banks promote economic growth even further". It was the third straight year that the Fed rejected the plan of the US division of Santander, which is one of Europe's biggest banks, and the second straight rejection for Deutsche Bank Trust Corp., the USA transaction bank and wealth management business of Germany's largest bank. Bank of America's calculation was US$12.1 billion less than the Fed's US$45 billion.

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"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.