The Federal Reserve's most recent stress test shows that the nation's largest banks could survive a major severe recession, though the test was significantly less rigorous than it has been. The regulatory exam was given to 22 banks with assets of more than $100 billion, Yahoo Finance reports, and found that they have enough capital on hand to withstand hundreds of billions in losses if a recession hits. "Large banks remain well capitalized and resilient to a range of severe outcomes," Fed Vice Chair Michelle Bowman said Friday in a statement.
The test was less vigorous because the global economy has weakened since last year, the Fed said, per the AP. In addition, past tests showed "unintended volatility" in their results, so the Fed said it wants public and industry comment to adjust future tests. The Fed also chose to not test the banks as heavily on their exposure to private equity assets, arguing that private equity assets are typically held for the long term and are not typically sold at times of distress. In a simulation in which GDP contracts by nearly 8%, unemployment climbs 10%, home prices drop by one-third, and the stock market drops by 50%, the 22 lenders demonstrated that their capital levels would not fall below a key threshold.
The test results could support the Trump administration's effort to loosen rules for financial institutions as part of its deregulation campaign, which it maintains will increase lending and economic growth, per Yahoo. The banks tested include JPMorgan Chase, Citigroup, Bank of America, Morgan Stanley, and Goldman Sachs. Now that they've passed, the banks will be able to issue dividends to shareholders and buy back shares of stock to return proceeds to investors, per the AP. The dividend plans are to be announced next week.
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