US Banks Prepared for Serious Financial Shocks
According to the Federal Reserve’s annual bank stress test, all 23 of the largest U.S. banks can withstand a severe economic downturn. The test, which evaluates capital levels, losses, revenue, and expenses in a hypothetical recession and financial market shock scenario, indicated that banks can continue to offer essential services such as lending to households and businesses.
Test Results Reveal Financial Resilience
The test results demonstrated that even with total projected losses amounting to $541 billion, all the analysed banks would still maintain above their minimum capital requirements. This strength of the banking sector was praised by Federal Reserve Vice Chair for Supervision, Michael Barr, who nevertheless cautioned against complacency and emphasised the need to remain prepared for a variety of economic and market pressures.
The Nature of Projected Losses
The 2023 test took into account a severe global recession scenario, which conjectured a 40% decline in commercial real estate prices, a 10% unemployment rate, an increase in office vacancies, and a 38% drop in housing prices. The Fed pointed out that despite these conditions resulting in heavy losses, banks would still be able to continue lending. Losses are projected to include $100 billion in commercial real estate and residential mortgages, and $120 billion in credit card losses.
Reactions and Implications
The Fed’s stress test also evaluated the resilience of banks’ trading books to a rising rate environment. Federal Reserve Chair, Jerome Powell, noted that the panel is closely monitoring any potential tightening of credit conditions, similar to the bank stress witnessed earlier this year. Commenting on the stress test results, the gold market recorded a dip, with spot prices last trading at $1,907.40 an ounce, down 0.33% on the day.