The nation's largest banks have sufficient capital to withstand a severe economic downturn, according to the most recent stress test conducted by the Federal Reserve Board.
In the worst-case scenario, the 18 banks, which include J.P. Morgan Chase, Goldman Sachs and Morgan Stanley, would lose $410 billion, but they would still have enough capital to meet regulatory requirements, according to the test results released June 21. Under this scenario, there would be a global recession with the U.S. unemployment rate rising by more than 6 percentage points to 10%, accompanied by a large decline in real estate prices and elevated stress in corporate loan markets.
The firms' aggregate common equity Tier 1 capital ratio, which compares high-quality capital to risk-weighted assets, would fall from an actual level of 12.3% in the fourth quarter of 2018 to a minimum level of 9.2%, according to the Fed. Since 2009, the common equity capital at the 18 firms has increased by more than $680 billion.
"The results confirm that our financial system remains resilient," Fed Vice Chairman Randal K. Quarles said in a statement accompanying the results. "The nation's largest banks are significantly stronger than before the crisis and would be well-positioned to support the economy even after a severe shock."
The Fed noted that it uses its own independent projections of losses and incomes for each firm and the results are not forecasts or expected outcomes.
This year, only the largest and most complex banks were tested. The Fed previously announced that smaller and less complex banks would now be tested on a two-year cycle. The 18 firms tested this year represent about 70% of the assets of all banks operating in the U.S., according to the Fed.
The Fed will release the results from its second test Thursday, which assesses the capital planning processes and capital adequacy of large bank holding companies and includes an evaluation of their planned capital distributions, such as dividend payments and share repurchases.
