US Banks Face Bigger Losses but Stay Strong in Annual Fed Test

US banks are doing well, even though they faced tougher challenges this year. The Federal Reserve's annual "stress test" showed that the biggest banks have enough money to survive a severe economic downturn.

What is the Stress Test?

Think of the stress test like a check-up for banks. The Federal Reserve looks at how well banks would do if the economy got really bad. This year, they imagined a situation where unemployment goes up, the stock market gets crazy, and the housing market crashes. Even in this tough scenario, the banks still had enough money to keep lending to people and businesses.

Key Findings

The Fed found that 31 big banks would be okay even in a severe economic crisis. They have a good amount of high-quality capital, which means they have money set aside for emergencies. The lowest level of this capital would be 9.9%, which is more than twice the required minimum.

What's Next for the Banks?

Because the banks did well, they can now announce plans to give money back to their shareholders through stock buybacks and dividends. They can start sharing these plans after the market closes on Friday.

Chris Marinac, a financial expert, said, "We were pleasantly surprised by the results. It shows that banks are in good health."

Steeper Losses

This year's test did show that banks had bigger hypothetical losses compared to previous years. This is because their investments have become riskier.

The banks tested would face a combined loss of $685 billion in the severe scenario. On average, their capital levels would drop by 2.8 percentage points, the biggest drop since 2018.

Top Performers

Among the tested banks, Charles Schwab had the highest capital levels, with a 25.2% ratio in the severe scenario. Other strong performers included Bank of New York Mellon, JPMorgan Chase, Morgan Stanley, Northern Trust, and State Street. Even the US branches of Deutsche Bank and UBS did well.

Smaller regional banks like BMO, Citizens Financial Group, and HSBC had capital levels closer to the minimum required.

Industry Reaction

The banking industry sees these results as proof that banks are strong. They argue that more regulations are not needed. Rob Nichols, CEO of the American Bankers Association, said, "The strength and resilience of the banking sector show that more regulations are unnecessary."

Where Banks Lost Money

Credit cards were a big source of losses, accounting for over a quarter of the hypothetical losses. Credit card balances have grown by over $100 billion in the last year, and more people are falling behind on payments.

Banks also lost money on corporate loans, especially those given to riskier businesses. These loans are three times more likely to default than safer loans.

Changes in Bank Income

The Fed noted that banks are earning less from fees and other non-interest income, while their expenses, like salaries and real estate costs, have not decreased.

Final Thoughts

Overall, the annual stress test is important because it determines how much money banks must keep in reserve. Any extra funds can be returned to shareholders. This year's results show that while banks are facing bigger challenges, they are still strong enough to handle a tough economy. This stability is good news for everyone, as it means banks can continue to support the economy by lending money to people and businesses.