The 35 largest banks in the U.S.–representing 80% of all bank assets in the U.S.– passed the first round of the Federal Reserve Bank’s annual stress test with flying colors, demonstrating that they have enough capital on hand to weather a severe global recession.
"Despite a tough scenario and other factors that affected this year's test, the capital levels of the firms after the hypothetical severe global recession are higher than the actual capital levels of large banks in the years leading up to the most recent recession," Federal Reserve Bank Vice Chairman Randal Quarles said in a statement.
The banks with more than $100 billion in assets just underwent the Federal Reserve’s annual stress test, the first round of the Fed's annual Comprehensive Capital Analysis and Review. In the toughest scenario – a severe global recession where unemployment surges to 10% and the Treasury yield curve steepens – the banks would lose a projected $578 billion.
This was the expected outcome, as analysts have been anticipating a full pass on the first round. This may not be the case with round two.
According to an article from Reuters, with the passing of this test, the banks are feeling good about their chances of increasing their dividends, share buybacks and investments, but some of them may falter in the second, tougher test that measures operational factors like risk management. The full results of the test will be issued Thursday after the second test.
“This is the science and next week is the art,” PwC Financial Services Risk Leader Mike Alix told Reuters.
“This is the mathematical calculation that shows there are robust levels of capital for most firms. Next week will be the judgment,” he added.