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Banks Can Withstand Severe Recession, Cleared for Payouts, Fed Says

U.S. banks' capital levels are strong, the banks can withstand a severe recession, and they are free of restrictions on dividends and buybacks, the Fed said.
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The large banks in the U.S. “continue to have strong capital levels and could continue lending to households and businesses during a severe recession,” the Federal Reserve said in its stress-test report Thursday.

The report frees the banks from restrictions on paying dividends and buying back stock.

“All 23 large banks tested remained well above their risk-based minimum capital requirements” and “the additional restrictions put in place during the COVID event will end,” the central bank said in a statement.

“All large banks will be subject to the normal restrictions of the Board's stress capital buffer framework.”

The banking system "is strongly positioned to support the ongoing recovery," the Fed's vice chairman for supervision, Randal K. Quarles, said.

The Federal Reserve began the stress tests after the 2008/2009 financial crisis to examine how various banks could manage through economic downturns.

Reuters reported that last year, during the pandemic and economic and societal lockdown, the banks came through an economic crunch much more extreme than the Fed's hypothetical scenario.

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As a result of that economic weakness, the Fed barred the banks from distributing capital and conducted two additional stress tests during 2020.

This year's hypothetical scenario “includes a severe global recession with substantial stress in commercial real estate and corporate debt markets,” the Fed said.

In this scenario, the unemployment rate rises 4 percentage points to a peak of 10.75%, gross domestic product falls 4% from fourth-quarter 2020 through third-quarter 2022, and asset prices decline sharply, with equities slumping 55%.

In these conditions, the Fed estimated, the 23 large banks would collectively lose more than $470 billion, with nearly $160 billion lost from commercial real estate and corporate loans.

Their capital ratios would decline to 10.6% -- but that’s still more than double their minimum requirements, the Fed said.

The KBW Nasdaq Bank Index, which includes major names like Bank of America  (BAC) - Get Report, Citi C, Bank of New York Mellon  (BK) - Get Report, Citizens Financial  (CFG) - Get Report, Comerica  (CMA) - Get Report and JPMorgan Chase  (JPM) - Get Report, finished on Thursday at 125.23.

That's up 1.54% from Wednesday's close at 123.33 and 28% up from 97.91 on Dec. 31.