Fed warns top U.S. banks of incoming $500b meltdown

Fed warns top U.S. banks of incoming $500b meltdown

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  • U.S. banks could survive a hypothetical $541bn loss, according to Federal Reserve’s annual stress tests.
  • The tests gauge banks’ ability to meet capital requirements under extreme economic scenarios.
  • Banks exceeding requirements can allocate capital to dividends and buybacks freely.

The financial colossi of the United States could weather a $541 billion loss in a hypothetical economic apocalypse.

This is the outcome of the annual stress tests carried out by the Federal Reserve, putting stalwarts like JPMorgan Chase and Goldman Sachs in a favorable light, allaying Wall Street fears regarding the systemic importance of banks amidst heavy losses.

The silver lining amidst a financial catastrophe

According to the Fed’s stress tests, U.S. banks emerged victorious with their capital reserves surpassing the test’s requirements. The tangible consequence of these test results manifests in the banks’ future capital holdings over the next year.

Should banks meet or exceed the Fed’s requirements, they could exercise freedom in allocating capital towards shareholder dividends and stock buybacks without any restrictions from the Federal Reserve.

Analysts anticipate an impending decline in the capital requirements of Wall Street stalwarts such as Goldman Sachs, JPMorgan, Morgan Stanley, and Bank of America.

This prospect, coupled with the anticipation of higher dividends or expanded share buybacks, spurred a 1.5 percent increase in these banks’ stock values in after-hours trading.

This fiscal forecast comes in the wake of a tumultuous period that witnessed the collapse of three of the largest U.S. banks – Silicon Valley Bank, Signature Bank, and First Republic, which catalyzed a regional banking crisis.

Despite this calamity, the smaller U.S. banks feeling the heat of investor pressure, such as PacWest and Comerica, were not part of these stress tests.

Taking into account global economic indices

The resilience of the banking system was confirmed by Michael Barr, the Fed’s vice-chair for supervision. Despite acknowledging the recent crisis, Barr urged regulators to consider other measurement mechanisms, highlighting the evolving nature of financial risks.

These annual stress tests, initiated following the 2008 financial crisis as part of the Dodd-Frank financial regulations, are designed to evaluate the ability of U.S. banks to maintain loss-absorbing capital ratios above the minimum requirements during an economic downturn.

This year’s test included a hypothetical scenario of unemployment peaking at 10%, a 40% slump in commercial real estate prices, a 38% drop in house prices, and short-term interest rates nearly bottoming out.

Among the 23 tested banks, Deutsche Bank’s U.S. subsidiary took the largest capital hit, followed by UBS Americas. Goldman Sachs and Morgan Stanley, both with substantial trading operations, saw significant declines in their capital levels.

Despite the projected losses of $541 billion, including $424 billion from loan losses and $94 billion from trading and counterparty losses, all the tested U.S. banks would meet the minimum capital requirements. In an inflation-heavy scenario, the eight largest banks would incur nearly $80 billion in trading losses.

The stress test results will be instrumental in determining the ‘stress-test capital buffer’ for each bank. This buffer is the amount of CET1 capital they must hold in excess of regulatory minimums relative to their risk-weighted assets.

This upcoming summer, the Fed, along with other U.S. banking regulators, will publish new international standards for calculating risk-weighted assets, known as the Basel III endgame rules.

However, the eventual implementation of these new rules might require American banks to hold more CET1 capital.

Despite the challenges, the U.S. banking system seems poised to withstand a significant financial blow, keeping the dreams of shareholders and financial enthusiasts afloat amidst the whirlpool of global economic uncertainties.

Disclaimer: The information provided is not trading advice. Cryptopolitan.com holds no liability for any investments made based on the information provided on this page. We strongly recommend independent research and/or consultation with a qualified professional before making any investment decision.

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Jai Hamid

Jai Hamid is a passionate writer with a keen interest in blockchain technology, the global economy, and literature. She dedicates most of her time to exploring the transformative potential of crypto and the dynamics of worldwide economic trends.

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