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Biggest US banks clear first hurdle in Fed's annual stress tests

24 June 2017

The biggest US banks and financial institutions have enough capital to withstand a crisis, according to the results of stress tests administered by the Federal Reserve, CNBC reports.

For the third year in a row, all of America's 34 largest lenders were found to have sufficient capital buffers to pass the annual stress tests enacted by President Obama after the financial crisis.

Top policymakers stressed proposed changes to the Dodd-Frank law should not undermine the strength of reforms born from the 2008 recession and aimed at preventing another financial crisis. The measures signal economic health but are only the first in a two-step process. They then ask what that would do to a bank's balance sheet.

The most severe hypothetical scenario projects $383 billion in loan losses at the 34 participating bank holding companies during the nine quarters tested.

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"In terms of reducing the regulatory burden, the biggest bang for the buck is to reduce the burden on smaller financial institutions", said FDIC Chairman Martin Gruenberg during a Senate Banking Committee hearing.

The most immediate impact of the announced stress test results for the banks will be on their capital plans for the year, which will be disclosed along with the second and final phase of the stress test results slated to be announced next week (June 28).

Most notably, the officials from the Federal Reserve and the Office of the Comptroller of the Currency said they'd like to see changes to the "Volcker rule", a key element of the 2010 Dodd-Frank Act that curbs banks' use of their own funds for high-risk trading. For example, Wells Fargo, a major lender to companies and for commercial real estate, estimated it would lose nearly $20 billion less than the $50.4 billion the Fed projected. The stated overall economic conditions - 50 percent drop in the stock market, 10 percent unemployment, and a 35 percent drop in real estate prices - are still pretty harsh. Analysts had expected U.S. banks to make a strong showing in this year's test.

Banks will get the chance to revise their capital plans before next week's results are released. The Fed says it was the first time that the tests showed credit card lending as the biggest loss category.

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The banks were tested to determine if they have large enough capital buffers to keep lending, even if hit with billions of dollars in losses brought on by a financial crisis and severe economic downturn.

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There is an important exception to this, though, as the the Fed can still reject a bank's capital plan due to qualitative factors brought to its notice.

The firms reviewed included Bank of America, JP Morgan Chase and Wells Fargo.

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Biggest US banks clear first hurdle in Fed's annual stress tests