US banks overcome upheaval to succeed in annual Fed health inspections

In a vote of confidence for a sector still recovering from upheaval earlier this year and facing an uncertain economic future, big US banks breezed through the Federal Reserve’s annual health check on Wednesday (June 28).

Lenders including JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Morgan Stanley, and Goldman Sachs were able to issue share buybacks and dividends after the Fed’s “stress test” exercise showed they have adequate capital to withstand a catastrophic economic downturn.

Under the Fed’s severe downturn scenario, which is one of its worst yet, the 23 banks evaluated, which have a combined asset base of more than $100 billion apiece, would lose a total of US$541 billion yet still possess more than twice the needed level of capital.

Even as the sector applauded the good results, some cautioned that they reflect an excessively hopeful image just months after the government was compelled to step in to safeguard depositors.

Dennis Kelleher, president and chief executive officer of the advocacy organization Better Markets, said: “This is hazardous, misleading, incomplete, and results in false comfort.

Regional lenders Citizens Financial Corp. and US Bancorp were the worst of the bunch, while Charles Schwab and Deutsche Bank’s US businesses were among the best.

In reference to the collapse of Silicon Valley Bank and two other lenders this year, Fed Vice Chair for Supervision Michael Barr said the results indicated the banking system was “strong and resilient,” but highlighted that it was just one indicator of the sector’s health.

In a statement, Barr added that “we should maintain humility about the potential for risks and continue our work to make sure that banks are resilient to a range of economic scenarios, market shocks, and other stresses.

For the eight “globally systemically important banks” in the nation, the average capital ratio, which measures the room banks have to absorb future losses, was 10.9%, up marginally from the previous year, according to a Reuters study.

Industry leaders praised the results immediately, claiming that they disproved Barr’s promise to implement stricter regulations.

The Consumer Bankers Association’s president and CEO, Lindsey Johnson, stated that these results are the best remedy for any residual concern related to recent bank failures.

“Recognizing this year’s scenario was the most difficult on record, these outcomes are the best antidote to any lingering anxiety surrounding bank failures,” Johnson said.