According to the Federal Reserve, the US big banks have certainly passed the latest test, despite tougher conditions.
The Fed said the evening was over, with the 35 largest institutions achieving a 7.9 percent risk-weighted Common Equity Tier 1 ratio, despite the assumption of an unemployment rate of 10 percent, a 7.5 percent decline in economic output and a steep yield curve. The minimum requirement was 4.5 percent. The banks, which accounted for 80 percent of the assets of the US banking market, were “heavily capitalized,” the Fed said.
However, the safety distance to the specifications was not quite as large as in the less severe test in 2017, in which 9.2 percent had been achieved. According to the Fed, two large banks passed the test for a supplementary benchmark, and the leverage ratio was only just short: Goldman Sachs came in at 3.1 percent, Morgan Stanley at 3.3 percent. Mandatory are at least 3.0 percent. In the case of this parameter, the assets are allocated to, inter alia, derivative positions.
“Despite the tough scenario and other factors influencing this year’s test, the capitalization of the big banks after a hypothetical global recession is higher than the actual capitalization in the years before the recent recession,” a statement by the bank supervisor said Fed vice boss Randal Quarles.
The results released on Thursday are only the first result of the stress test. In a second step, the US Federal Reserve wants to announce on Thursday next week, whether the banks may use funds for the payment of dividends or share repurchases. Last year, this was allowed to all participating institutes. This year, the economic backdrop for the banks is also very favorable due to robust economic growth and tax cuts.