US Banks Demonstrate Resilience in Stress Test, Withstand Severe Recession Scenario

The United States Federal Reserve has released the results of its annual stress tests, indicating that all 23 of the country’s largest banks have demonstrated the ability to withstand a severe recession scenario. However, the report also highlighted some relative weaknesses among midsize and regional banks, although these institutions were not included in the stress tests.

Following the banking crisis earlier this year, policymakers at the Fed suggested that future stress tests could become more rigorous to address potential risks. Michael Barr, the Fed’s vice chair for supervision, emphasized the importance of maintaining resilience to various economic scenarios and market shocks, urging continued efforts in this regard.

Stress tests have been conducted annually since the 2008 financial crisis, which was primarily caused by US banks. The tests evaluate the potential losses that the banking industry could face in the event of skyrocketing unemployment and a significant contraction in economic activity.

In this year’s stress test, the Fed examined a severe global recession scenario, leading to a 40% decline in commercial property prices and a 38% decline in home property prices. Unemployment in the worst-case scenario reached 10%, while the current rate stands at 3.7%.

According to the stress test results, the 23 largest banks would collectively experience losses amounting to $541 billion under the severe recession scenario.

To pass the stress test, banks must maintain a stressed capital ratio of at least 4.5%, which serves as a crucial measure of their financial strength.

Earlier this year, the American banking system faced significant challenges with several high-profile collapses, including Silicon Valley Bank, Signature Bank, Silvergate Bank, and First Republic Bank. Other institutions, such as PacWest and Western Alliance, also faced uncertainties.

In response, the Fed launched the Bank Term Funding Program (BTFP) in March to provide support to smaller banks. According to Federal Reserve data, over $100 billion has already been allocated to prop up struggling small and mid-sized banks through this program.

For more news, find me on Twitter or subscribe to my YouTube channel.

What is your opinion on this issue? Leave me your comment below! I’m always interested in your opinion!

Leave a Reply

Your email address will not be published. Required fields are marked *

Recommended for you