US banks suffer steeper losses, but retain large cushions in annual Fed health check

Vita Resources NL

26/06/2024 21:30

By Pete Schroeder and Nupur Anand
       WASHINGTON, June 26 (Reuters) - The biggest U.S. banks
would have enough capital to withstand severe economic and
market turmoil, the Federal Reserve's annual "stress test"
exercise showed on Wednesday, but firms faced steeper
hypothetical losses this year due to riskier portfolios.
    The exercise found 31 big banks would weather a spike in the
jobless rate, severe market volatility, and dives in the
residential and commercial mortgage markets and still retain
enough capital to continue lending. 
    Specifically, the Fed found levels of high-quality capital
at the banks would dip to 9.9% at their lowest levels, which is
more than twice the regulatory minimum.
    The relatively clean bill of health clears the way for the
banks to announce capital plans to shareholders in the coming
days, including stock buybacks and dividends. Banks can announce
capital plans after the market closes on Friday, a senior Fed
official said.
    However, the test did find banks suffered steeper losses
this year, and not because the test got tougher. The 2024
version of the stress test was broadly similar to last year's,
and the Fed said the higher losses were due to how bank
portfolios have shifted in the last year.
    The Fed singled out growing credit card balances and
delinquency rates, riskier corporate credit portfolios, and
lower projected profits as weighing on banks this year.
    "It is not changes in the scenario driving the results.
Rather, the three main factors driving this year's results were
associated with changes in banks' balance sheets," said Fed Vice
Chair for Supervision Michael Barr in a statement.
    The banks that were tested would suffer a combined $685
billion in losses under a hypothetical severe scenario. On
average, banks saw their capital ratios fall by 2.8 percentage
points, the steepest decline since 2018.
    Of the banks tested, Charles Schwab Corp reported the
highest capital levels under the test, posting a 25.2% capital
ratio under that severe scenario. Bank of New York Mellon Corp,
JPMorgan Chase, Morgan Stanley, Northern Trust and State Street
all reported double-digit capital ratios after the test, as did
the US operations of Deutsche Bank and UBS.
    By comparison, some smaller regional lenders saw their
capital levels skirt closer to the minimums, with BMO, Citizens
Financial Group, and HSBC all reporting stressed capital ratios
below 7%.
        The largest global banks all posted capital ratios well
above minimums, with JPMorgan posting the highest at 12.5%, and
Wells Fargo the lowest at 8.1%. Bank of America posted a 9.1%
capital ratio, and Citigroup posted a 9.7% ratio.
  
    While banks were expected to perform well under this year's
exam as they have in years prior, the annual results are
significant for each firm because how well they perform dictates
how much capital they must hold against potential losses. Excess
funds beyond those capital levels can then be returned to
shareholders.

 (Reporting by Pete Schroeder, editing by Deepa Babington)
 ((Pete.Schroeder@thomsonreuters.com; 202-310-5485;))