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US banks pass financial stress tests

by InterSpaceReporter

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The Federal Reserve’s stress tests are designed to monitor banks’ financial strength

The 35 largest banks operating in the US have enough money on hand to withstand a severe financial crisis despite rising levels of credit card debt.

That was the finding of the annual “stress tests” conducted by the US central bank, the Federal Reserve.

The US introduced the tests after the financial crisis to monitor financial strength in the event of a downturn.

The firms reviewed account for about 80% of all bank assets in the US.

The tests are intended to evaluate whether banks have enough of a financial cushion to handle a global recession.

‘Hypothetical recession’

Under the central bank’s stress scenario the unemployment rate would rise to 10% and stock prices and property prices would plunge.

The Federal Reserve calculated this would lead to roughly $578bn (£436bn) in total losses at the banks, but said their holdings of “high quality capital” would remain above the minimum required.

The ratio of high quality capital to risky assets would fall to as low as 7.9% in the hypothetical recession, compared with the 4.5% minimum requirement, it said.

Last year, the cushion was slightly higher at 9.2%.

The Federal Reserve said the performance in this year’s tests, the eighth since 2009, reflected changes in the US tax law, as well as higher levels of credit card debt.

The central bank also said it had also measured the banks against a more severe hypothetical downturn than last year.

The banks subject to review included firms such as Goldman Sachs and Morgan Stanley, as well as US divisions of foreign companies, such as Barclays and Deutsche Bank.

Goldman Sachs, which was among the worst performers, said its internal evaluation model differs from the Fed’s.

It said it is examining the differences and that its financial capacity “may be higher than this year’s test would otherwise indicate.”

New rules from Congress recently reduced the number of banks which are subject to the tests.

After changes passed this spring, banks with less than $100bn in assets are exempt from the reviews. Previously, banks with $50bn or more were generally subject to the tests.

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