Can Big Banks Survive A Recession? Here’s What Fed’s Stress Test Reveals


Visit: Benzinga


Benzinga Staff Writer


  • All banks evaluated passed the stress test result as capital exceeded the minimum required
  • Hypothetical scenarios used this year were more stringent
  • This gives clearance for big banks to pay dividends and bonuses

Big U.S. banks’ strong capital levels equip them to continue lending to households and businesses during a severe recession, the Federal Reserve has revealed.

What Happened:  

All banks held capital above the minimum capital requirement even as they are expected to report an aggregate loss of $612 billion, the results of a Fed stress test showed on Thursday.

Losses of the large banks rose over $50 billion compared to the 2021 test. That included more than $450 billion in loan losses and $100 billion in trading and counterparty losses.

“Under stress, the aggregate common equity capital ratio – which provides a cushion against losses – is projected to decline by 2.7 percentage points to a minimum of 9.7 percent, which is still more than double the minimum requirement,” the Fed said.

Stress tests ascertain whether large banks are robust enough to support the economy during a recession.

The central bank noted that this year’s hypothetical scenario was tougher than in 2021. It included a severe global recession with substantial stress in commercial real estate and corporate debt markets.

The assumptions included:

  • Unemployment rate rising 5-3/4 percentage points to a peak of 10%
  • GDP declines of 10%
  • Nearly 40% drop in commercial real estate prices
  • 55% drop in stock prices

Why It’s Important:  

Apart from relaying a positive signal on the strength of the nation’s banking system, the results also mean big banks are now free to do capital distributions and discretionary bonus payments.

Wall Street firms such as JPMorgan Chase & Co., Morgan Stanley, Citigroup Inc., Goldman Sachs Group, Inc., and Bank of America Corporation can dole out billions of dollars in dividends and also pay bonuses to their C-suites.

Price Action:

The SPDR S&P 500 ETF Trust added 0.98% on Friday before settling at 378.06, according to  Benzinga Pro data.

Originally Posted June 24, 2022 – Can Big Banks Survive A Recession? Here’s What Fed’s Stress Test Reveals

Disclosure: Benzinga

© 2022 Benzinga does not provide investment advice. All rights reserved.

Disclosure: Interactive Brokers

Information posted on IBKR Traders’ Insight that is provided by third-parties and not by Interactive Brokers does NOT constitute a recommendation by Interactive Brokers that you should contract for the services of that third party. Third-party participants who contribute to IBKR Traders’ Insight are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.

This material is from Benzinga and is being posted with permission from Benzinga. The views expressed in this material are solely those of the author and/or Benzinga and IBKR is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

In accordance with EU regulation: The statements in this document shall not be considered as an objective or independent explanation of the matters. Please note that this document (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and (b) is not subject to any prohibition on dealing ahead of the dissemination or publication of investment research.

Any trading symbols displayed are for illustrative purposes only and are not intended to portray recommendations.

Disclosure: ETFs

Any discussion or mention of an ETF is not to be construed as recommendation, promotion or solicitation. All investors should review and consider associated investment risks, charges and expenses of the investment company or fund prior to investing.  Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.