| | | Biggest Banks Pass Fed’s Stress Tests
The ability of most banks to breeze through the so-called stress tests is an indication of how far Wall Street has come since the financial crisis.CreditJeenah Moon for The New York Times
By Matt Phillips and Jim Tankersley
The nation’s biggest banks are strong enough to continue lending if the economy plunges into a severe downturn, an assessment by the Federal Reserve on Thursday that could fuel Wall Street’s calls to further relax financial regulations.
The results of the first phase of the Fed’s annual “stress tests” showed that the country’s banks have more than enough capital to survive the combination of a recession, cratering of housing prices and double-digit unemployment.
The banks are riding high thanks to tax cuts and recent moves to soften regulations. They are eager to return more of their profits to shareholders, and the test results suggest regulators will give many the green light to pay dividends or buy their own shares next week.
Still, two Wall Street giants — Goldman Sachs and Morgan Stanley — came close to falling short on one of the Fed’s financial-health gauges. That could complicate their plans to pay dividends and repurchase their shares.
The ability of most banks to ace the tests is an indication of how far Wall Street has come since the financial crisis. A decade ago, bad bets on the housing market crippled the industry and led the government to bail out hundreds of banks.
To prevent a repeat of those taxpayer-financed rescues, the Fed now requires banks to maintain capital cushions that would allow them not only to stay afloat but also to keep lending during periods of intense financial stress. Since 2009, the 35 banks that underwent the tests have added about $800 billion in the highest quality type of capital, the Fed said.
The Fed’s annual simulation tested 35 of the largest banks, including the United States units of several foreign firms. Under the Fed’s “severely adverse scenario,” which envisions the economy rapidly sinking into a recession, banks would suffer losses totaling $578 billion, but they would still have enough capital to stay above the minimum levels required by the central bank.
“Despite a tough scenario and other factors that affected this year’s test, the capital levels of the firms after the hypothetical severe global recession are higher than the actual capital levels of large banks in the years leading up to the most recent recession,” Randal K. Quarles, the Fed’s vice chairman for supervision, said in a statement.
This is the second straight year that all the big United States banks were found to have enough capital to withstand a hypothetical recession. In 2017, the banks sailed through the first round of the stress tests, and, a week later, the Fed approved all 34 banks’ plans to return money to their shareholders.
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