The 31 largest U.S. bank-holding companies would collectively lose about $340 billion in a steep and prolonged economic downturn yet be able to keep enough capital on hand to continue lending, the Federal Reserve reported late Thursday.
After the close of markets, the Fed released its fifth stress-test results in the aftermath of the 2008 financial crisis. It determined that the largest institutions had adequate capital to ride out future economic storms and allow businesses and households to keep borrowing.
The lack of sufficient capital and high levels of borrowed money used to run daily operations brought down Bear Stearns and Lehman Brothers in 2008, prompting the near-collapse of the U.S. financial system.
Thursday’s detailed results on the severe scenario assumed 27 months of protracted economic decline, 10 percent unemployment, a 60 percent drop in the stock market and a 25 percent decline in home prices. They also presumed higher defaults of corporate bonds, something possible for large energy firms if oil prices remain unusually low.
Under the Fed’s severe scenario, which is somewhat like the 2008 downturn, 31 bank-holding companies would see a deterioration of the ratio of their healthiest and accessible capital to their riskiest assets. This ratio would fall from the 11.9 percent posted in the third quarter of 2014 to 8.2 percent in a hypothetical crisis scenario.
While that reflects deterioration from the most recent measure of this ratio, it is an improvement from the ratio of 5.5 percent measured at the start of 2009 when the financial crisis was in full bloom. It suggests the biggest banks collectively are on more solid footing to face any adversity.
“Higher capital levels at large banks increase the resiliency of our financial system,” Federal Reserve Governor Daniel K. Tarullo said in a statement. “Our supervisory stress tests are designed to ensure that these banks have enough capital that they could continue to lend to American businesses and households even in a severe economic downturn.”
While all the bank-holding companies passed the stress tests, those with a heavy reliance on credit-card lending would be among those hardest hits. Credit card losses would account for $82.9 billion of the $340 billion in projected losses. The holding companies with largest relative hits would be American Express co., Discover Financial Services and Capital One Financial Corp.
Two holding companies belonging to foreign parents - Hong Kong’s HSBC North America Holdings Inc. and Spain’s Santander Holdings USA Inc. - show larger than average projected losses too.
The banks tested together represent 80 percent of domestic banking assets. The Fed results Thursday are part of a larger review of bank capital and bank planning. The fuller review, which will determine whether the large banks can pay dividends to investors, are scheduled for release next Wednesday afternoon after financial markets close.
The Fed said it uses its own independent projections of losses and incomes for each of the 31 holding companies.
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