US Six Major Banks Pass Stress Test...Restrictions on Share Buybacks and Dividends Lifted

Bloomberg Estimates 160 Trillion Won Cash Withdrawal Scale for 6 Major Banks

[Photo by AFP Yonhap News]

[Asia Economy Reporter Byunghee Park] The six major U.S. banks, including JP Morgan Chase and Goldman Sachs, are expected to announce large-scale share buyback and dividend plans after the 28th (local time). This is because the cash expenditure restrictions were lifted after passing the Federal Reserve's (Fed) stress test (capital adequacy assessment).

According to Bloomberg on the 24th, the Fed announced the results of this year's stress test, stating that major banks easily met capital requirements. It also stated that restrictions on share buybacks and dividends imposed on banks would be lifted as bank soundness was confirmed.

Bloomberg estimated that the cash expenditure through share buybacks and dividends by the six major banks could exceed $140 billion (approximately 159 trillion won). Barclays predicted it could reach $200 billion by next year.

The Fed's stress test is a process to check whether banks have sufficient capital to lend to households and businesses during a severe economic downturn. The Fed introduced stress tests after the 2008 global financial crisis and has conducted them once a year. Last year, considering the exceptional situation of COVID-19, it conducted stress tests twice.

Randall Quarles, Vice Chairman of the Fed responsible for bank supervision, said, "Over the past year, we conducted three Fed stress tests assuming different recession scenarios and confirmed that the banking system has secured solid soundness to support the ongoing economic recovery."

[Image source= Bloomberg]

The worst recession scenario assumed in this stress test was a situation where the U.S. Gross Domestic Product (GDP) declines for seven consecutive quarters, the unemployment rate soars to 11%, and the New York Stock Exchange plunges by 55%.

The Fed estimated that total losses of the 23 banks participating in this stress test would exceed $470 billion under such a recession scenario. It also stated that the tier 1 capital ratio of the 23 banks dropped to 10.6% in this situation but still far exceeded the Fed's minimum requirement of 4.5%.

Among the six major banks, Morgan Stanley had the highest tier 1 capital ratio at 12.7%. Even the lowest banks, Goldman Sachs and Wells Fargo, had 8.8%, well above the required standard. JP Morgan Chase was at 10.7%, Bank of America (BOA) at 9.9%, and Citigroup at 9.4%.

This content was produced with the assistance of AI translation services.