Biggest US banks clear first hurdle in Fed's annual stress tests

Jun 23, 2017, 04:42
Biggest US banks clear first hurdle in Fed's annual stress tests

The report said some stress tests should be conducted every two years instead of annually and that they should be limited to the largest banks.

The largest USA banks collectively showed that they can withstand a severe economic downturn and continued to improve their capital positions, according to the results of Dodd-Frank Act-mandated stress tests the Federal Reserve released today.

The testimony comes as the Trump administration prepares to modify much of the regulation included in the 2010 Dodd-Frank financial reform law, which was enacted in response to the crisis. The measures signal economic health but are only the first in a two-step process. Before Thursday's results, analysts predicted banks would be able to return more than US$120 billion to shareholders over the next four quarters, or about 85 percent of their profit. Fed officials will decide next week whether to approve banks' plans to pay dividends and repurchase shares.

A former Federal Reserve governor and possible candidate for future top positions at the central bank said Wednesday that the Fed isn't as independent or permanent as many think.

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The results are the first since Republican President Donald Trump took office and called for a relaxation of capital regulations to encourage banks to lend more.

It's the third consecutive year there have been no banks failing. "The reason we need to reform ourselves is because we believe in an independent central bank subject to the oversight of Congress and the selection of the president".

BB&T Corp. projected Thursday it would experience an overall $2.6 billion revenue loss if the US economy were to go through a severe downturn during a 2½-year period ending March 31, 2019. Bank dividends hit $102.8 billion in 2016, according to the FDIC.

The other five largest banks, JPMorgan, Bank of America, Wells Fargo & Co (WFC.N), Goldman Sachs Group Inc (GS.N) and Morgan Stanley (MS.N), showed common equity Tier 1 capital ratios between 8.4 and 9.4 percent in the Fed's most aggressive scenario.

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The combined loan losses would be $383 billion. For example, Wells Fargo, a major lender to companies and for commercial real estate, estimated it would lose nearly US$20 billion less than the US$50.4 billion the Fed projected.

The financial industry, and mid-size banks in particular, have complained of the burden the new regulations place on lenders.

"This year's results show that, even during a severe recession, our large banks would remain well capitalized", Fed Governor Jerome Powell said in a statement.

Mr. Warsh also hinted that the Fed could eventually be at risk of being dismantled if it doesn't make needed changes from within.

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