Pete Schroeder and Nupur Anand
4 min read
By Pete Schroeder and Nupur Anand
WASHINGTON (Reuters) -Twenty-two of the largest banks in the U.S. are well-positioned to weather a hypothetical severe economic downturn and continue lending, with firms maintaining robust capital levels even after suffering hundreds of billions of dollars in losses, the Federal Reserve reported on Friday.
The results of the U.S. central bank's annual "stress test" of large banks' finances found firms remain resilient in the face of a potential recession, a spike in unemployment, and market turmoil. The optimistic showing could lead to banks upping how much excess capital they plan to distribute to shareholders via dividends or stock buybacks.
In aggregate, the test found the banks suffered losses of more than $550 billion in the Fed's scenario, which drove down their capital levels by 1.8 percentage points. But even then, firms retained more than twice the minimum level of capital required by regulations.
On average, the test found banks retained an average 11.6% ratio of their common equity tier 1 capital, well above the 4.5% minimum required.
The results of the annual exam are significant for banks as their performance in the exercise sets the "stress capital buffer" they must hold against potential losses. Those buffers typically are finalized in August, according to Fed officials.
The relatively clean bill of health from the central bank clears the way for the firms to announce capital plans to shareholders as soon as Tuesday after U.S. markets close, Fed officials said.
"This supports ongoing, if not higher buybacks for the banks" given that loan growth has been sluggish and their balance sheets have grown, said Chris Marinac, director of research at Janney Montgomery Scott.
"I also think you're going to see a strategy from banks where there is more emphasis on buybacks over dividends," he said, noting that banks that underwent stress tests have seen an average 3% decline in outstanding shares over the last five quarters.
Some analysts said the strong results could even drive further bank lending.
"The stress tests have proven that most banks have more than twice the reserve capital required, so there is evidence that they could use this to spur loan growth," said Brian Mulberry, portfolio manager at Zacks Investment Management, which holds banking stocks. "Considering that the U.S. consumer is still strong and the stress test supports their healthy positions, we could see the banks pull some of the capital back and channel it into lending."
