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Large US banks can handle economic downturn: Fed

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The Federal Reserve holds bank stress tests every year, but held two in 2020 due to the upheaval caused by the Covid-19 pandemic./AFP
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Jun 25, 2021 - 01:05 AM

WASHINGTON — The largest US financial institutions have sufficient capital to continue lending during a severe economic downturn, the Federal Reserve said Thursday as it released the results of its latest stress tests.

The 23 banks that took part in the annual trials gauging whether they could maintain capital requirements in hypothetical economic crises all passed, remaining “well above their risk-based minimum capital requirements,” the Fed said in a statement.

“Over the past year, the Federal Reserve has run three stress tests with several different hypothetical recessions and all have confirmed that the banking system is strongly positioned to support the ongoing recovery,” the central bank’s Vice Chair for Supervision Randal Quarles said.

The results clear the way for restrictions on dividends and share buybacks to be lifted starting in July.

The Fed had ordered buybacks suspended and dividend payments limited in June 2020 as Covid-19 caused a sharp economic downturn, and then relaxed those restrictions last December, allowing capital distributions limited to an amount based on a bank’s previous income.

“Today’s stress test results clearly show that the nation’s largest banks have strong balance sheets and remained highly capitalized throughout the pandemic,” the American Bankers Association said after the release of the results.

In this year’s test, banks faced a hypothetical scenario in which unemployment rises to a peak of nearly 11 percent, GDP falls four percent over two years and asset prices fall 55 percent, with much of the stress occurring in the corporate debt and commercial real estate markets.

The 23 banks tested lost more than $470 billion altogether under that scenario but managed to keep their capital ratios at double the minimum requirements.

The Fed normally conducts one stress test a year, but added a second in 2020 given the pandemic and the ensuing downturn. Both of last year’s tests concluded that large banks were sufficiently capitalized in the event of a downturn.

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