Date
24 November 2017
The Fed uses the tests to assess whether banks have sufficient capital to absorb losses resulting from a severe economic shock. Photo: Internet
The Fed uses the tests to assess whether banks have sufficient capital to absorb losses resulting from a severe economic shock. Photo: Internet

Fed tests find US$500 bln risk for banks

United States banking regulators found 31 banks vulnerable to a “severely adverse” scenario such as recession and a stock market meltdown.

They could faces losses of nearly US$500 billion, the Financial Times reported Friday, citing results of a stress test by the US Federal Reserve.

All 31 banks passed the latest round of checks, clearing a minimum capital adequacy ratio of 5 percent to their risk-weighted assets.

Last year, one of the smaller banks fell short.

The Fed found that in a “severely adverse” scenario, including a deep recession and market meltdown, the banks would suffer combined losses of US$490 billion over nine quarters.

Some of the bigger banks would also come close to the 5 per cent capital threshold.

Morgan Stanley, in particular, would see a drop in its tier one common ratio from 15 per cent at the end of the third-quarter last year to as low as 6.2 per cent.

By the end of the period, its capital ratio would be 41 per cent smaller compared with falls of 40 per cent at JPMorgan and 39 per cent at Citi.

A Fed official nonetheless welcomed continued increases in the amount of absorbent capital held by the groups in the fifth round of stress tests since 2009 thanks to the effects of a strengthening US economy and efforts by the banks to beef up their capital ratios by retaining more profits.

The Fed uses the tests to assess whether banks have sufficient capital to absorb losses resulting from a severe economic shock as happened in the 2007-09 financial crisis.

Citi was one of four banks to fail the test on qualitative grounds last year, along with Royal Bank of Scotland, Santander and HSBC.

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