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US Banks Clear First Obstacle to Federal Reserve's Annual Stress Test



People send a sign to JPMorgan Chase at the headquarters in Manhattan, New York.

Spencer Platt | Getty Images

The 18 largest banks operating in the United States took the first step towards distributing capital on dividends, sharing withdrawals and other investments on Friday after clearing the first phase of their annual health check with the US The Federal Reserve, which assesses their ability to deflect a major economic downturn.

The central bank said that lenders, including JPMorgan Chase & Co, Citigroup Inc, Goldman Sachs, Morgan Stanley and Bank of America Corp, would have lost $ 41

0 billion under its most serious recession scenario ever, but high-quality levels will still Be far above regulatory minimum conditions.

"The nation's largest banks are significantly stronger than before the crisis and would be well placed to support the economy even after a serious shock," Fed Vice Chairman Randal Quarles said in a statement.

The Fed said hypothetical losses were largely comparable to those of previous years with the largest credit card credit lines followed by commercial and industrial loans.

Friday's results, the first of the two-part annual "stress test" showed that the country's largest lenders could meet at least Fed standards based on information they submitted to the regulator.

But banks could still stumble next Thursday when the Fed announces whether it will allow banks to split dividends and buy shares. The second test is stricter whether it is safe for banks to implement their capital plans. It also reviews operational controls and risk management.

All eyes are on Deutsche Bank, which is becoming possible for its fourth five-year flunch in connection with ongoing turmoil in its US operation, Reuters reported Thursday. Last year, the Fed failed the bank and cited "material weaknesses" in its data capacity and capital planning.

The Fed created stress tests in the financial crisis 2007-2009 to ensure that banks are strong enough to continue lending through a serious economic downturn.

This year's tests are more streamlined after a Fed review of the process, which has long been hated by the industry. About half of the banks were tested this year compared to 2018, after the Fed moved several small businesses earlier this year to a two-year test cycle.

The 18 banks tested this year hold about 70 percent of all US bank assets, according to the Fed.

Moreover, most banks can no longer fail on "qualitative" grounds. Previously, banks that had sufficient capital could still be flunked if the Fed identified risk management and operational issues.

In March, the Fed said it dropped this qualitative objection for domestic US banks. Only the US subsidiaries of five foreign lenders – Deutsche Bank, Credit Suisse Group AG, UBS Group AG, Barclays Plc and TD Bank – will face this hurdle this year.

Since the first test in 2009, banks have seen losses shrink, loan portfolios improve and profits grow. The largest banks have also strengthened their balance sheets by adding more than $ 680 billion in tier 1 capital, Fed says.

This year's recession scenario included a jump to 10 percent unemployment as well as increased stress on the corporate market and falling property prices. However, the Fed has also given the banks more information on the test models this year, after many years of industrial policy, it has been established that the process is too opaque.


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