Big Banks Clear First Phase of Federal Reserve Stress Tests

The Federal Reserve released initial results of its yearly stress tests to determine whether the nation's banks are financially strong enough to weather a severe recession

The Fed was yesterday also scheduled to publish the results of annual stress tests for major banks, which are called for under Dodd-Frank and meant to make sure lenders are on solid capital footing in the event of a crisis.

Even after being pounded by a severe economic downturn, banks collectively had a 9.2% capital buffer, staying well above the Fed's minimum of 4.5%.

The tests' hypothetical "severely adverse" scenario showed $100 billion in projected losses from credit card loans for the banks. The Fed said the losses would reduce the banks' high-quality capital from 12.5 percent of its loans in the fourth quarter past year to 9.2 percent at the end of 2017.

Rob Nichols, president and chief executive officer of the American Bankers Association, said the Fed should consider a number of recommendations recently laid out by the Treasury Department, including making the stress tests more transparent and less frequent.

US financial regulators and lawmakers who appeared at a congressional hearing on Thursday generally agreed that the Volcker rule, which restricts banks' ability to make bets with their own money, needs to be reconsidered. Before Thursday's results, analysts predicted banks would be able to return more than US$120 billion to shareholders over the next four quarters, or about 85 percent of their profit.

The rule should focus only on banks that do a lot of trading, said Federal Reserve Governor Jerome Powell, who leads banking regulation for the central bank.

President Trump has vowed to scrap many regulations on banks, particularly those that he says have suppressed lending.

Banks and their investors have been hoping the improvements would prompt the Fed to allow them to use more capital for stock buybacks and dividends, especially as the Trump administration is seeking to relax financial regulations. Those banks represent about 75 percent of all USA assets.

Under the Fed's examination, Citi's minimum CET1 ratio in the most stressful scenario was the highest among big Wall Street banks, at 9.7 percent.

Banks that decide to resubmit their plans can only make downward revisions to the amount of capital they plan to use, meaning management teams that were too conservative may regret their submissions even if they pass.

USA banks passed the first round of stress tests issued by the Federal Reserve to determine whether the banks could survive potential recessions, according to CNBC. They then ask what that would do to a bank's balance sheet.

In last year's second round, the Fed barred USA businesses of two European banks, Germany's Deutsche Bank and Spain's Santander, from raising dividends or boosting stock buybacks. "We should continue to tailor our requirements to the size, risk, and complexity of the firms subject to those requirements", he wrote.

CIT was added this year to the banks tested by the Fed.

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