The US Systemic Banks Withstand the Stress Test

Large banks can survive a severe recession

The US Systemic Banks Withstand the Stress Test

The United States Federal Reserve has determined that all 23 of the country's largest banks have passed the severe recession stress test, and are fit to survive a severe recession.

A bank must have a stressed capital ratio of at least 4.5% to be considered for a passing grade, according to the Fed. The test examines giants including JPMorgan Chase and Wells Fargo, international banks with large U.S. operations, and the biggest regional players including PNC and Truist.

According to the tests, the 23 largest banks would have collective losses of $541 billion should a severe recession occur. Bank stress tests have been performed every year since the 2008 financial crisis, which was caused by U.S. banks. The Fed tests how severe banking industry losses would be in case of high unemployment and contracted economic activity. In this year’s stress test, the Fed tested a severe global recession scenario based on 40% and 38% declines in commercial and home property prices respectively, and the unemployment rate of 10%.

Following the banking crisis earlier this year, the Fed's vice chair for supervision, Michael Barr announced the results in a reserved manner: “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.”

Although the big, systemic bank can withstand a severe recession, some experts express concerns over the conditions of mid-size and regional banks as they still carry significant risks. According to the Fed’s data, more than $100 billion has already been spent this year propping up small and mid-sized banks in the aftermath of the banking crisis that occurred in the spring.

“It’s a positive sign that the big 23 banks passed the stress test. But this is just a stress test for the macro economy. And it wasn't that the stress test gave a clean bill of health. [It] illuminated that commercial real estate risk within these big banks is significant. If we do go into recession, these 23 banks hold 20% of all commercial real estate and that's offices, downtown buildings—that is a looming risk,” Mark T. Williams, a former Federal Reserve Bank examiner stated to Fortune.

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