U.S. Fed says banks can weather severe downturn comfortably (updated)

Citizens Financial (Delaware)

23/06/2022 21:56

(Adds more details on results, analyst quote)
    By Pete Schroeder and Michelle Price
    WASHINGTON, June 23 (Reuters) - The largest U.S. banks would
remain well capitalized in the event of a severe economic shock,
the U.S. Federal Reserve said on Thursday after the lenders'
annual health check, paving the way for them to issue share
buybacks and dividends.
    The 34 lenders with more than $100 billion in assets that
the the Fed oversees would suffer a combined $612 billion in
losses under a hypothetical severe downturn, the central bank
said. But that would still leave them with roughly twice the
amount of capital required under its rules. 
    As a result, banks including JPMorgan Chase  JPM.N , Bank of
America  BAC.N , Wells Fargo  WFC.N , Citigroup  C.N , Morgan
Stanley  MS.N  and Goldman Sachs  GS.N  can use their excess
capital to issue dividends and buybacks to shareholders.
    Under its annual "stress test" exercise established
following the 2007-2009 financial crisis, the Fed assesses how
banks' balance sheets would fare against a hypothetical severe
economic downturn. The results dictate how much capital banks
need to be healthy and how much they can return to shareholders.
    Banks must wait until after markets close at 4:30 p.m. EDT
(2030 GMT) on Monday to announce their capital distribution
plans. 
    While the 2022 scenarios were devised before Russia’s
invasion of Ukraine and the current hyper-inflationary outlook,
they should give investors and policymakers comfort that the
country's banks are well-prepared for what economists warn is a
potential U.S. recession later this year or next.
    The 34 banks suffered heavy losses in this year's scenario,
which saw the economy contract 3.5%, driven in part by a slump
in commerical real estate asset values, and the jobless rate
jumping to 10%. See an EXPLAINER on the stress tests here:
 urn:newsml:reuters.com:*:nL4N2YA30Q
    But even then, the Fed said aggregate bank capital ratios
were still roughly twice the minimum amount required by
regulators.
    
    STRONG SHOWING
    In 2020 the Fed changed how the test works, scrapping its
"pass-fail" model and introducing a more nuanced, bank-specific
capital regime.
    The test assesses whether banks would stay above the
required minimum 4.5% capital ratio, which provides a cushion
against potential losses. Banks that perform well typically stay
well above that.
    The average capital ratio for the 34 banks was 9.7%, the Fed
said. That compares with 10.6% last year, when the Fed tested 23
lenders against a slightly easier scenario.
    "The stress tests show that the nation’s largest banks are
strong and serve as a source of stability for an economy facing
some pronounced headwinds in the coming months," said Isaac
Boltansky, director of policy research for brokerage BTIG.
    Huntington Bancshares Incorporated  HBAN.O  had the lowest
ratio at 6.8%, while Deutsche Bank's U.S. operations had the
highest ratio at 22.8%. 
    The test also sets each bank's "stress capital buffer," an
extra capital cushion on top of the regulatory minimum, the size
of which is determined by each bank's hypothetical losses under
the test. The Fed will announce those buffers in coming months.
    Credit Suisse bank analysts this week estimated the average
stress capital buffer for big banks will be 3.3%, up from 3.2%
in 2021, with the range between 2.5% and 6.3%. 
    They also estimated the amount of capital lenders
redistribute to shareholders in 2022 will decline roughly 10%
from a year earlier. 

 (Reporting by Pete Schroeder and Michelle Price, editing by
Deepa Babington)
 ((michelle.price@thomsonreuters.com; +12026041711; Twitter:
@michelleprice36;))