Fed Stress Tests Indicate Major US Banks Could Survive Recession

America’s largest banks could collectively withstand another severe recession and are much better placed to withstand severe economic shocks than they were before the 2008-09 financial crisis, according to the latest round of stress tests conducted by the US Federal Reserve (Fed).

The annual tests carried out on the biggest banks in the US indicate the resilience of a bank’s balance sheet if subjected to the combined impact of widespread unemployment, a stock market crash and a slump in the housing market.

Out of 18 banks subjected to the latest stress test only one, Ally Financial, was judged at risk of failure in such a scenario. The gauge used, the ratio of a bank’s capital to its risk-weighted assets, should produce a minimum stressed ratio level of 5%, while Ally Financial’s was only 1.5%. Out of the remaining 17 banks tested, Bank of New York Mellon (BoNY Mellon) had the best stressed ratio at 13.2%, followed by State Street at 12.8%. However, Goldman Sachs and Morgan Stanley were next at the bottom of the rankings after Ally Financial, at 5.8% and 5.7% respectively.

Collectively the 18 major US banks, which account for 70% of all US banking assets, would have an overall stress ratio of 7.7% at the end of recession lasting three successive quarters. Although the figure has fallen below the combined 11.1% as of 30 September last year, it is still above the figure of around 5% reached in the depths of the financial crisis at the end of 2008 according to Fed officials.

“The stress tests are a tool to gauge the resiliency of the financial sector,” said Fed governor Daniel Tarullo. “Significant increases in both the quality and quantity of bank capital during the past four years help ensure that banks can continue to lend to consumers and businesses, even in times of economic difficulty.”

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