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The biggest US banks have all passed the Federal Reserve’s annual tests of whether they can withstand a future economic and market crisis, prompting analysts to predict a sharp increase in dividends and share buybacks.
The Fed said on Friday that under its “severely adverse” scenario, in which unemployment surges to 10 percent, the 22 banks, including JPMorgan Chase, Goldman Sachs, and Bank of America, would lose more than $550 billion. However, they would suffer a much smaller hit to capital than in recent years and remain well within required regulatory standards.
The theoretical recession used by the Fed to test banks’ resilience was less severe than the previous year’s. While the scenario was designed before President Donald Trump’s return to office, it comes at a time when his administration is pushing to soften financial regulations.
“Large banks remain well-capitalized and resilient to a range of severe outcomes,” said Michelle Bowman, the Fed’s vice-chair for supervision.
The results of the Fed’s “stress tests” will be used to calculate the minimum level of capital that banks need relative to their risk-adjusted assets, providing a critical buffer to absorb losses.
Jason Goldberg, analyst at Barclays, forecasted on the basis of this year’s results that Goldman Sachs would be the biggest winner among the leading US lenders as its minimum capital level would drop from 13.7 percent to 10.7 percent. Wells Fargo, M&T Bank, and Morgan Stanley would also have their capital requirements cut by 1 percentage point, he predicted.
He added that this was likely to raise the amount of excess capital that most banks seek to return to shareholders via dividends and share buybacks. “We expect share repurchase (in dollars) to increase 12 percent at [the] median bank relative to the prior year’s exam, with most banks stable to higher,” he said.
Banks are optimistic that the tests will become even more accommodating after the Fed responded to a legal challenge by the main banking lobby group with a promise to overhaul the exercise. The central bank said earlier this year it planned to make the exercise more transparent and to average the test results over the past two years to reduce volatility.
The banks are required to wait until Tuesday to provide an update on what they expect their new capital requirement to be. They frequently lay out plans for dividends and share buybacks after the Fed stress tests.
The Fed said this year’s stress tests would push banks’ aggregate tier one capital ratio, their main cushion against losses, down by 1.8 percentage points — a smaller drop than in recent years and well below the 2.8-percentage-point fall in last year’s exercise.
But the Fed said it expected to calculate banks’ capital requirements on the basis of its two-year averaging proposal, providing that was finalized in the coming weeks. This will increase the capital hit to 2.3 percent. Bowman said the change was preferable “to address the excessive volatility in the stress test results and corresponding capital requirements”.
The lender with the biggest fall in its capital due to the theoretical stress was Deutsche Bank’s US operation, which had a hypothetical decline of more than 12 percentage points, based on the averaged results of the past two tests. The next largest falls were at the US subsidiaries of Switzerland’s UBS and Canada’s RBC. But they all remained more than double the 4.5 percent minimum level through the exam.
In this year’s “severely adverse” scenario, US GDP declined 7.8 percent in a year, unemployment rose 5.9 percentage points to 10 percent, and inflation slowed to 1.3 percent. House prices fell 33 percent, and commercial property prices dropped 30 percent.
While this would be one of the most extreme recessions in history, it is milder than the one drawn up by the Fed last year. The theoretical market crash — with share prices falling 50 percent and high-yield bonds selling off sharply — was also less severe than in last year’s exercise.
The Fed said banks benefited from their higher profitability. It added that it had included lower hypothetical losses from private equity after “adjusting how these exposures are measured to better align with these exposures’ characteristics”.
Under pressure from Trump to ease the regulatory burden in support of growth and investment, the Fed has announced plans to rework many of its rules for banks.
This week, the Fed and the two other main banking watchdogs announced plans to slash the enhanced supplementary leverage ratio, which sets how much capital the biggest banks need to have against their total assets.
By providing a snapshot of the current state of US banks in relation to their ability to withstand economic crises, the Federal Reserve’s stress tests serve as a critical tool for ensuring the stability of the financial system. The results of these tests not only provide valuable insights into the health of the banking sector but also have significant implications for shareholders and investors. As banks navigate the changing regulatory landscape and strive to meet capital requirements, the outcome of these stress tests will continue to shape the future of the financial industry. In today’s fast-paced world, it can be easy to get caught up in the hustle and bustle of everyday life. From work commitments to family responsibilities, it seems like there is always something demanding our attention. However, it is important to take a step back and prioritize self-care in order to maintain a healthy and balanced lifestyle.
Self-care is a broad term that encompasses a range of activities and practices aimed at promoting overall well-being. This can include anything from getting enough sleep and eating a balanced diet to practicing mindfulness and engaging in hobbies that bring us joy. The key is to find what works best for you and make it a priority in your daily routine.
One of the most important aspects of self-care is taking care of our physical health. This can involve regular exercise, eating nutritious foods, and getting enough rest. Exercise has been shown to have numerous benefits, including improving mood, reducing stress, and boosting overall health. Whether it’s going for a run, practicing yoga, or taking a dance class, finding a form of exercise that you enjoy can make a big difference in how you feel both physically and mentally.
In addition to physical health, mental health is equally important when it comes to self-care. Taking time to relax and unwind can help reduce stress and improve overall well-being. This can include activities such as meditation, deep breathing exercises, or simply taking a few moments to enjoy a cup of tea and read a book. Finding ways to quiet the mind and focus on the present moment can help alleviate anxiety and promote a sense of calm.
Self-care also involves setting boundaries and learning to say no when necessary. It can be easy to overextend ourselves and take on too much, leading to feelings of overwhelm and burnout. By prioritizing our own needs and recognizing when we need to take a step back, we can better manage our time and energy and avoid feelings of stress and exhaustion.
Ultimately, self-care is about making yourself a priority and taking the time to nurture your mind, body, and spirit. By incorporating self-care practices into your daily routine, you can improve your overall well-being and feel more balanced and fulfilled. Remember, self-care is not selfish – it is essential for maintaining a healthy and happy life. So take some time for yourself today and practice self-care in whatever way feels best for you.
