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US banks suffer steeper losses, but retain large cushions in annual Fed health check
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US banks suffer steeper losses, but retain large cushions in annual Fed health check
Jun 26, 2024 1:55 PM

WASHINGTON (Reuters) - The biggest U.S. banks would have enough capital to withstand severe economic and market turmoil, the Federal Reserve's annual "stress test" exercise showed on Wednesday, but firms faced steeper hypothetical losses this year due to riskier portfolios.

The exercise found 31 big banks would weather a spike in the jobless rate, severe market volatility, and dives in the residential and commercial mortgage markets and still retain enough capital to continue lending.

Specifically, the Fed found levels of high-quality capital at the banks would dip to 9.9% at their lowest levels, which is more than twice the regulatory minimum.

The relatively clean bill of health clears the way for the banks to announce capital plans to shareholders in the coming days, including stock buybacks and dividends. Banks can announce capital plans after the market closes on Friday, a senior Fed official said.

However, the test did find banks suffered steeper losses this year, and not because the test got tougher. The 2024 version of the stress test was broadly similar to last year's, and the Fed said the higher losses were due to how bank portfolios have shifted in the last year.

The Fed singled out growing credit card balances and delinquency rates, riskier corporate credit portfolios, and lower projected profits as weighing on banks this year.

"It is not changes in the scenario driving the results. Rather, the three main factors driving this year's results were associated with changes in banks' balance sheets," said Fed Vice Chair for Supervision Michael Barr in a statement.

The banks that were tested would suffer a combined $685 billion in losses under a hypothetical severe scenario. On average, banks saw their capital ratios fall by 2.8 percentage points, the steepest decline since 2018.

Of the banks tested, Charles Schwab Corp ( SCHW ) reported the highest capital levels under the test, posting a 25.2% capital ratio under that severe scenario. Bank of New York Mellon Corp ( BK ), JPMorgan Chase ( JPM ), Morgan Stanley ( MS ), Northern Trust ( NTRS ) and State Street all reported double-digit capital ratios after the test, as did the US operations of Deutsche Bank and UBS.

By comparison, some smaller regional lenders saw their capital levels skirt closer to the minimums, with BMO, Citizens Financial Group ( CFG ), and HSBC ( HSBC ) all reporting stressed capital ratios below 7%.

The largest global banks all posted capital ratios well above minimums, with JPMorgan ( JPM ) posting the highest at 12.5%, and Wells Fargo ( WFC ) the lowest at 8.1%. Bank of America ( BAC ) posted a 9.1% capital ratio, and Citigroup ( C/PN ) posted a 9.7% ratio.

While banks were expected to perform well under this year's exam as they have in years prior, the annual results are significant for each firm because how well they perform dictates how much capital they must hold against potential losses. Excess funds beyond those capital levels can then be returned to shareholders.

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