Major US banks pass Fed's stress test

The U.S. Federal Reserve (Fed) reported that banks it stress-tested are in good position to weather a severe recession. The Fed has announced the results of its annual stress test of 31 large U.S. banks, including Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, and Wells Fargo. In a statement, the bank said that while large banks will face greater losses compared to last year’s test, they are in good position to weather a severe recession and remain above minimum capital requirements. The statement conveyed that the scenarios based on assumptions in this year’s stress test include a severe global recession with a 40 percent drop in commercial real estate prices, a significant increase in vacant offices, and a 36 percent drop in housing prices. It was noted that the scenario envisages the unemployment rate reaching a peak of 10 percent and economic output falling proportionately. The statement said that although the scenarios were relatively unchanged compared to last year, the larger capital decrease seen in this year's test was due to banks' corporate loan portfolios becoming riskier, the increase in credit card debts and high default rates, and the decrease in profit expectations. Fed Vice Chairman for Supervision Michael Barr stated that this year's stress test showed that large banks have sufficient capital to withstand a very stressful scenario and meet minimum capital ratios. Barr stated that although the severity of this year's stress test was similar to last year's, the test resulted in higher losses because bank balance sheets were slightly riskier and expenses were higher. "The purpose of our test is to help banks ensure that they have enough capital to absorb losses in a very stressful scenario. This test shows that they do."