Big banks clear Fed’s latest ‘stress test’

The world’s biggest banks are well-positioned to weather a significant economic downturn, according to “stress test” results from the Federal Reserve.

The central bank reported Thursday that 31 of the biggest banks would suffer hundreds of billions of dollars in losses during a severe recession, but still would be able to remain afloat and continue lending. 

{mosads}The results are significant because banks unable to withstand such an economic shot would not be permitted by the Fed to provide more to shareholders via dividends and other methods.

The Fed still has to sign off on bank capital plans before those rewards can occur. While just one bank failed the test last year, the Fed rejected five capital plans overall, citing “qualitative concerns” with the others. Citigroup, the nation’s third-largest bank, was among that group.

The Fed reported that under its hypothetical doomsday scenario, the banks would see their high-quality capital ratio fall to 8.2 percent, from the current level of 11.9 percent. When the Fed tested the banks back in 2009, those levels fell to 5.5 percent.

The stress test, the fifth the Fed has conducted since the financial crisis, subjects the banks’ books to scenarios in which the economy contracts severely, the stock market collapses by over half, home prices are slashed and the unemployment rate spikes.

The last time the Fed put banks to the test one year ago, it refused to let five banks, including Citigroup, provide shareholder rewards. The Fed citied “qualitative concerns” with nearly all of those that failed. And for Citi, the Fed specifically said its size and complexity presented “significantly heightened supervisory expectations” that had not been met.

The banks tested by the Fed account for roughly 80 percent of all assets held by banks in the United States.