Fed: "Banks are well positioned against recession"

According to the Federal Reserve, all 23 largest U.S. banks are well positioned to weather a severe recession and can continue to lend to households and businesses. This positive news emerged from the Federal Reserve's annual stress test, which tested banks on their capital levels, losses, income and expenses under a hypothetical scenario of a recession and financial market shock.

Despite the projected losses of $541 billion, all 23 banks meet minimum capital requirements. However, Michael Barr, the Federal Reserve's Vice Chair for Supervision, emphasized the importance of humility and ongoing efforts to ensure banks' resilience in various economic scenarios and market conditions.

The 2023 stress test included a severe global recession scenario with a significant 40% drop in commercial real estate prices, a 10% unemployment rate, an increase in office vacancies and a 38% drop in house prices. Despite this, according to the Fed, the big banks remain able to continue to provide credit. 

The total projected losses of $541 billion will be mainly concentrated on commercial real estate and residential mortgages (more than $100 billion) and credit card losses ($120 billion), according to the central bank. The Fed has also analyzed market shocks and concluded that the trading portfolios of the largest banks were resilient under the tested conditions of rising interest rates. The individual results of the stress test are used to set the capital requirements for each bank so that they hold sufficient capital to weather a severe recession and financial market shock.

Federal Reserve Chair Jerome Powell indicated that the Federal Open Market Committee (FOMC) continues to closely monitor possible further tightening of credit conditions following the recent banking stress. After the announcement of the stress test results, there was a slight decline in the gold market. 

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Source:
Kitco:https://www.kitco.com/news/2023-06-28/U-S-biggest-banks-can-weather-severe-recession-Fed-s-annual-bank-stress-test.html
Author:
Anna Golubova