(PresidentialInsider.com)- All 23 of the country’s major banks have the ability to withstand another severe economic downturn, if one were to occur.
On Thursday, the Federal Reserve announced all the major financial institutions passed the Dodd-Frank stress test this year. In a statement, Randal Quarles, the vice chair for supervision at the Federal Reserve, said:
“Over the past year, the Federal Reserve has run three stress tests with several different hypothetical recessions, and all have confirmed that the banking system is strongly positioned to support the ongoing recovery.”
Banks that have more than $250 billion worth of assets must be subjected to annual stress tests. This was put in place in 2010 with the Dodd-Frank Act, a reform law for financials passed after the financial crisis of 2007-2008.
Banks that have assets valued between $100 billion and $250 billion must go through the stress tests every other year. In 2021, four of those such banks chose to be tested again just to make sure.
The stress tests see if banks have sufficient capital to handle any massive losses during a hypothetical recession, while continuing to lend to businesses and households.
The tests also assist the Federal Reserve with setting capital requirements for all the large banks. If banks fall below the levels, they can be subject to penalties.
During the worst financial times of the pandemic, the Fed banned banks from distributing any dividends to investors or buying back any shares of their stock. That is now allowed.
The most recent stress tests looked at how well the banks would handle an economic downturn resulting in an unemployment rate of 10.75%. In addition, the hypothetical GDP would fall 4% over 12 months, asset prices would fall by 55%, and “substantial stress” would occur in commercial real estate and corporate debt markets.
Under these scenarios, the banks would lose $470 billion, but their capital ratios would only go down by 10.6%, the Fed reported. The minimum is 4.5%.
Bank advocates say the results of the stress tests show that the banking industry is strong and dependable for America’s economy going forward.
As the CEO and president of Financial Services Forum, Kevin Fomer, said:
“The strength and resiliency of the nation’s largest banks have been reconfirmed through this hypothetical stress test as well as their performance throughout the dramatic course of the global economy over the past 15 months. We are proud of the supportive role our member banks have been able to play for American businesses and households.”
There are some, though, that feel the stress tests are predictable and watered down, meaning their results are rather useless. The CEO and president of the non-profit group Better Markets, Dennis Kelleher, commented:
“Of course, the largest banks have ample levels of capital to weather the economic downturns reflected in the Fed’s scenarios — that is the Fed’s policy objective.”