Jun 23, 2022 - Economy

Fed stress test finds big banks can weather extreme economic shock

Pedestrians pass a Chase bank branch in New York. Photo: Victor J. Blue/Bloomberg via Getty Images

The nation's biggest banks are healthy enough to withstand a severe economic downturn, the Federal Reserve said on Thursday announcing the results of its annual stress test.

Why it matters: The banks proved they had enough capital to continue lending in a hypothetical scenario that saw unemployment skyrocket and commercial real estate prices and stocks collapse. The results of the yearly checkup open the door for banks to return billions of dollars to investors.

Details: All 34 of the biggest banks tested — including Goldman Sachs, J.P. Morgan and Citigroup — had more than the minimum amount of capital required by regulators after projected losses of over $600 billion under the Fed's made-up economic scenario.

  • That scenario was more extreme than last year since the economic baseline was healthier: the unemployment rate rises to 10%, commercial real estate prices fall 40% and stock prices drop 55%.
  • How the banks do in the test determines how much capital they are required to set aside for a rainy day. Excess cash can be paid out to shareholders via dividends and stock buybacks.

The backdrop: The annual stress test, which the Fed started conducting after the 2008 financial crisis, comes as the nation grapples with heightened economic uncertainty. Inflation is rising at the fastest clip in over 40 years and the Fed has undertaken an aggressive interest rate hiking campaign to try to contain it, prompting fears of a coming recession.

  • Trade groups representing the big banks applauded the results: "Amidst increased economic headwinds, today’s outcome should serve as a welcome reminder that no matter the challenges ahead, banks are ready and willing to help weather the storm," Richard Hunt, CEO of the Consumer Bankers, said in a statement.
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