Big banks resist, Fed lifts restrictions
The Fed had imposed restrictions on major US banks a year ago, citing the need to conserve capital during the crisis.
Thursday’s announcement signals a form of normalization after the crisis that arose last year due to the spread of Covid-19.
Reuters/Photo d’illustration
The US central bank announced Thursday that major US banks have passed stress tests with flying colors, allowing restrictions imposed during the pandemic on dividend payouts and share buybacks to be lifted.
Concretely, banks like JPMorgan Chase, Wells Fargo and Bank of America, will soon be able to spend tens of billions of dollars in dividends and share buybacks and thus please their shareholders. “All of the 23 major banks tested had amounts of capital much greater than those required in view of the risks,” the Federal Reserve (Fed) said in a statement.
Therefore, she adds, “the additional restrictions put in place during the Covid will end” on June 30 “in accordance” with what was announced on March 25.
Keep capital
The Fed imposed these restrictions a year ago, citing the need to conserve capital during the crisis. It prohibited these large establishments from carrying out share buyback programs and capped dividend payments to shareholders. This measure was to be completed initially at the end of December 2020. It had been lightened but extended initially, until March 31, then until the end of June.
“Over the past year, the Federal Reserve has carried out three stress tests with several hypothetical recessions and all have confirmed that the banking system is solidly positioned to support the ongoing economic recovery,” said the vice president in charge of overseeing these tests, Randal Quarles, cited in the press release.
Stress tests were put in place by the Dodd-Frank law after the 2008 financial crisis. Until the crisis caused by the Covid-19 pandemic, they were generally carried out only once a year.
Protection
Thursday’s announcement signals a form of normalization after the crisis that arose last year due to the spread of Covid-19 which had crippled not only the US economy but also the global economy.
The tests assess the resilience of large banks by estimating their losses, income or even their capital levels, which provide protection under hypothetical conditions and over a period of nine quarters to come.
The results unveiled Thursday “clearly show that the largest banks in the country have solid balance sheets and have remained strongly capitalized throughout the pandemic”, welcomed the director of the federation representing US banks ABA, Rob Nichols. After helping their clients during the health crisis, “they will continue to do their part to stimulate the economic recovery underway in the country,” he added in a statement.
Recession and corporate debt
For these latest tests, the Fed took as a basis a severe global recession combined with significant tensions in the commercial real estate market and corporate debt. In this scenario, the unemployment rate rose 4 percentage points to a peak of over 10% while the Fed is currently forecasting an unemployment rate of 4.5% at the end of 2021.
Gross domestic product fell by 4% between the fourth quarter of 2020 and the third quarter of 2022. And asset prices fell sharply, “with a 55% drop in stock prices.”
On the basis of these catastrophic elements, “the 23 big banks would collectively lose more than 470 billion dollars (431.5 billion francs), including nearly 160 billion dollars (147 billion francs) of losses linked to real estate. commercial and business loans, ”explains the Fed. “However, their capital ratios would drop to 10.6%,” which would remain more than double the minimum required rate.
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