Federal Reserve: US banking system ‘strongly positioned to support the ongoing recovery’

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on Jun 25, 2021
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  • Federal Reserve says 23 banks are "well above" required capital levels in the event of a recession.
  • Although the industry will post losses of $474 billion, loss-buffer capital will be double the required levels
  • Banks expected to release dividends and buybacks to shareholders following the latest stress test.

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The Federal Reserve announced on Thursday that the most prominent US banks could withstand a severe recession. According to results from the Fed’s annual stress test, all the 23 banks were “well above” the required minimum capital levels in a hypothetical economic crunch, CNBC reported

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Fed tested for a ‘severe’ recession

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The Fed said that its evaluation included scenarios in which a “severe” global recession hurts corporate debt holders. It also assumed unemployment peaks of 10.8% and a 55% stock market crash. These variables have now proven to be overly conservative but were required as part of the stress test. Specifically. banks fared exceptionally well during the crisis, thanks to aid from the Fed and legislators, storing capital for predicted loan losses that didn’t materialize in most cases.

The Fed’s Supervision Vice Chair Randal K. Quarles said:

Over the past year, the Federal Reserve has run three stress tests with several different hypothetical recessions and all have confirmed that the banking system is strongly positioned to support the ongoing recovery.

The encouraging update helped lift bank stocks higher Friday morning. Among the more notable names in the bank group, shares of Wells Fargo & Co (NYSE: WFC) gained 2.4%, Bank of America Corp (NYSE: BAC) gained more than 1.5% while JPMorgan Chase & Co. (NYSE: JPM) added around 1%.

Lenders can now return capital to shareholders after the latest exam

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During the coronavirus pandemic, banks underwent extra stress test rounds with restrictions on returning capital to shareholders via buybacks and dividends. The Fed had previously stated that those would be lifted, and the central bank has now made good on its pledge.

After passing the latest test, the industry will reclaim some of its autonomy since the last crisis. Banks will now have more flexibility in distributing dividends and buybacks and at least one analyst is bullish on the latest development. Jefferies analyst Ken Usdin told CNBC:

So long as [banks] stay above that stress capital buffer requirement and all their other requirements every quarter, a bank can technically do whatever it chooses to do with regards to buybacks and dividends.

According to persons familiar with the matter, the Fed has urged lenders to wait until Monday afternoon to reveal their capital return plans. Current expectations among the analyst community are for the industry to increase dividends and buybacks by tens of billions of dollars starting in July.

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