US Banks with Strong Crisis Response Capabilities

US Federal Reserve Stress Tests All Passed
Fundamentals Remain Strong Even Under More Severe Conditions Than Last Year

[Asia Economy Reporter Minwoo Lee] U.S. banks have demonstrated solid fundamentals by passing this year’s Federal Reserve (Fed) stress tests. The Fed judged that banks would be able to continue lending to households and businesses even amid a severe economic recession.

According to the financial sector on the 26th, the Fed announced that all 34 major U.S. banks, including JPMorgan Chase and Bank of America, passed the annual stress tests. Even assuming the worst economic downturn with soaring unemployment and plummeting stock prices, the banks were deemed capable of maintaining strong capital levels.

This year’s scenario assumed a 10% increase in unemployment, a 3.5% decline in gross domestic product (GDP), a 40% drop in commercial real estate prices, a 28.5% fall in housing prices, and a 55% plunge in stock prices. Despite this, U.S. banks’ average common equity tier 1 (CET1) capital ratio stood at 9.7%, well above the minimum requirement of 4.5%. Although this was a slight decrease from last year’s 10.6%, the difference was not significant. Considering that last year’s test assumed a less severe recession and covered only 23 banks, this year’s results are regarded as a strong performance.

However, under stress conditions, the average CET1 ratio of the six largest U.S. banks fell to 9.1%, down from 10.1% last year and 9.7% in December 2020. The capital ratio decline was particularly pronounced among commercial banks such as JPMorgan, Bank of America, and Citigroup. This is attributed to increased risk exposure compared to 2020, driven by loan growth, reversal of loan loss provisions, and the resumption of shareholder returns last year. For investment banks, the decreases in CET1 ratios and leverage ratios (based on total exposure) were slight compared to last year.

Choi Sungjong, a researcher at NH Investment & Securities, said, “Given that this year’s scenario is more severe, the strengthened capital reserves since the financial crisis have made U.S. banks’ crisis response capabilities relatively robust. While the stress tests demonstrate the stability of major U.S. banks and may alleviate some liquidity concerns arising from real economy shocks, the Fed’s aggressive tightening in anticipation of a recession is expected to lead to somewhat conservative operations.”

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