“America’s largest banks are more prepared to withstand a severe U.S. recession and a global downturn than at any time since the 2008 financial crisis, the Federal Reserve says.
The Fed’s annual “stress tests” showed Thursday that as a group, the 18 banks hold fewer bad loans compared with last year, helped by a stronger economy. The Fed will announce next week whether it will approve the banks’ plans to issue dividends or repurchase shares.
Under the stress tests’ most severe scenario, the United States would undergo a recession in which unemployment would reach nearly 12 percent, stocks would lose half their value and home prices would plunge 20 percent.
The Fed data show that one of the banks, Ally Financial Inc., would have a much lower capital buffer against losses than the others under the most severe scenario.
“The results of so-called stress tests on Thursday, mandated by the Dodd-Frank financial overhaul law and conducted by the Federal Reserve, indicate that most banks would survive a severe recession and a crash in the markets. The tests, which measured a bank’s capital during extreme hypothetical conditions, also produced some unlikely winners.
Citigroup, for example, outperformed its rivals just one year after a poor performance embarrassed the bank. Bank of America also showed improved capital levels under stressed conditions.
Morgan Stanley and JPMorgan Chase, however, produced some of the lowest results among large Wall Street firms. The banks have significant trading operations that can rack up big losses in turbulent times. Goldman Sachs, another trading firm, also struggled under one measure of future health.