All the banks have enough capital to withstand a severe recession, Fed says

The nation’s largest financial institutions all have enough of a capital cushion to withstand a severe recession, the Federal Reserve said Thursday in an annual test designed to head off the kind of risks that threatened the economy during the 2008 financial crisis.

The 34 banks would lose a combined $493 billion in the most extreme scenario modeled by the Fed’s annual “stress tests.” It’s characterized by a severe global recession and a U.S. unemployment rate that more than doubles to 10% as well as heightened stress in corporate loan and commercial real estate markets.

Under those conditions, a common measure of the banks’ aggregate core capital as a share of total assets would fall from 12.5% to 9.2%. In other words,  they would still hold sufficient capital to keep lending.

“This year’s results show that even during a severe recession, our large banks would remain well-capitalized,” Fed Governor Jerome Powell said. “This would allow them to lend throughout the economic cycle, and support households and businesses when times are tough.”

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The 34 banks assessed by the Fed  --  including J.P. Morgan Chase, Bank of America, Wells Fargo and Citigroup -- each generally have at least $50 billion in assets representing more than 75% of the assets of all U.S. banks. Since 2009, the companies have added more than $750 billion in common equity capital, the Fed said.

The stress tests are a legacy of the Great Recession and financial crisis. The housing crash caused several large banks to fail and prompted the federal government to spend $700 billion to bail out others in an extraordinary effort to prevent a collapse of the financial system. This is the seventh round of stress tests since 2009.

Although all the banks were deemed well-capitalized, that appraisal is based on their dividend payments and share buybacks last year. The Fed will release a second round of stress test results next week that will examine their plans for quarterly dividend and share purchases this year. It will also take a broader look at their management practices and safeguards.

Banks that pass that test will be allowed to raise their dividend payouts and share buybacks.