All of the 34 largest USA banks are fortified enough to withstand a severe US and global recession and continue lending, the Federal Reserve said Thursday. "This would allow them to lend throughout the economic cycle, and support households and businesses when times are tough".
The tested banks included Bank of America, JP Morgan Chase, Wells Fargo, Morgan Chase and the Deutsche Bank Trust Corp, a United States unit of the troubled German financial giant. That is much better than the 4.5 percent threshold that regulators demand, and an improvement on the 8.4 percent common equity tier 1 capital ratio assessed previous year.
Trump has promised to undo various restrictions on financial firms that were put into place after the 2008 financial crisis, including the 2010 Dodd-Frank Act.
The results of the central bank's so-called stress tests showed 34 major lenders were on solid capital footing, it said.
Mr Powell said this week the Fed would be open to reasonable changes to the law, including the threshold for including banks in the stress tests.
The Fed has changed the emphasis in stress scenarios from year-to-year to keep banks from managing their portfolios to the test.
"This year's results show that, even during a severe recession, our large banks would remain well capitalized", Fed Gov. Jerome Powell said in a statement. Shareholders of the fourth-largest USA bank have been clamouring for management to buy back more of its stock, which is trading below what its assets are worth.
The Fed can reject a bank's capital plan for either reason.
Banks coming closest to not meeting the minimum capital ratio were Ally Financial, with a tested level of 6.5 percent; Capital One Financial, with 7.0 percent; Huntington Bancshares, 7.0 percent; KeyCorp, 6.8 percent; and SunTrust Banks, 7.1 percent. Passing the stress test does not necessarily mean a lender will pass the CCAR as the PhDs at the Fed can approve or flunk a bank based on qualitative as well as quantitative grounds. Before Thursday's results, analysts predicted banks would be able to return more than US$120 billion to shareholders over the next four quarters, or about 85 percent of their profit. With $100 billion each, the two categories represent about 52 percent of the total $383 billion in projected loan losses. With the Dodd-Frank results in hand, now banks have the option of revising their capital plans before CCAR is released. This was the first year that all the country's big banks passed since the recession.
Citigroup performed the best with a tier 1 capital ratio of 9.7 per cent. Ally Financial and KeyCorp were both below seven per cent.
Fed Governor Powell said recently that regulators will share more information with the industry during next year's exams after bankers complained the process was too opaque.