The US Federal Reserve on Thursday gave passing grades to all 33 of the country’s biggest banks in annual stress tests, which gauged each lender’s ability to weather a severe economic downturn.
In a series of doomsday hypothetical scenarios drafted by the Fed, the banks would collectively lose $612bn, and the group’s capital ratios would decline to 9.7 per cent, more than double the minimum requirement, the Fed said.
The banks, which included JPMorgan Chase and Goldman Sachs as well as US subsidiaries of foreign banks such as Credit Suisse, had to show they maintained capital levels above the government-mandated minimums after enduring the scenarios outlined by the Fed in February.
The results are an endorsement of the financial strength of the largest US banks, some of which are classified by regulators as systemically important to the economy.
Credit Suisse’s US subsidiary experienced the biggest capital hit in the stress tests, with its common equity tier one, or CET1, capital ratio declining by almost eight percentage points, followed by HSBC and Goldman.
The bulk of the hypothetical losses came from $450bn in loan losses and $100bn in trading and counterparty losses. Compared to last year’s stress tests, the banks reported more than $50bn in additional losses and took greater hits to their capital reserves.
“This year’s hypothetical scenario is tougher than the 2021 test, by design, and includes a severe global recession with substantial stress in commercial real estate and corporate debt markets,” the Fed said in a statement, attributing the banks’ resilience to the “substantial” build-up of capital since the global financial crisis more than a decade prior.
Read more on the stress tests here