Over Half A Trillion Dollars Could Exit US Banking System In ‘Severely Adverse’ Scenario, Fed Warns

The Federal Reserve has released its annual bank stress test, predicting that more than half a trillion dollars could exit the U.S. banking system in a “severely adverse” scenario.

The report reveals that 23 of the largest U.S. banks would “have sufficient capital to absorb more than $540 billion in losses and continue lending to households and businesses under stressful conditions.”

The losses are comprised of $424 billion in loan losses, which accounts for 78% of total losses, and $18 billion in additional losses from items such as loans booked under the fair-value option, accounting for 3% of total losses.

Roughly $94 billion in losses can be attributed to “aggregate trading” at 11 of those banks, accounting for 17% of total losses, and $5 billion in securities losses, accounting for 1% of total losses.

“All 23 banks tested remained above their minimum capital requirements during the hypothetical recession, despite total projected losses of $541 billion,” the Fed stated on June 28. 

According to the Fed, this year’s stress test factors in a global recession with a 40% decline in commercial real estate prices; a substantial increase in office vacancies; a 38% decline in house prices; and the unemployment rate rising by 6.4% to a peak of 10%.

Meanwhile, banks, including JPMorgan Chase & Co (NYSE: JPM), Wells Fargo & Co (NYSE: WFC), and Morgan Stanley (NYSE: MS), are planning to raise their quarterly dividends after clearing the Federal Reserve’s annual stress test.

The stress-test criteria were established before the regional bank turbulence in March, which means the test did not evaluate banks based on the repercussions of the interest rate hikes that recently affected midsize lenders.

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Edited by Arnab Nandy