US banks shrug off turmoil to ace Fed’s annual health checks

By Pete Schroeder

WASHINGTON (Reuters) – Big U.S. banks sailed through the Federal Reserve’s annual health check on Wednesday, in a vote of confidence for a sector still recovering from turmoil earlier this year and facing an uncertain economic outlook. The Fed’s “stress test” exercise showed lenders, including JPMorgan Chase (NYSE:), Bank of America (NYSE:), Citigroup (NYSE:), Wells Fargo (NYSE:), Morgan Stanley (NYSE:) and Goldman Sachs (NYSE:), have enough capital to weather a severe economic slump, paving the way for them to issue share buybacks and dividends. The 23 banks tested, which all have more than $100 billion in assets each, would suffer a combined $541 billion in losses under the Fed’s severe downturn scenario, but would still have over twice the amount of capital required under its rules.

Among the top performers were Charles Schwab (NYSE:) Corp. and Deutsche Bank (ETR:)’s US operations, while regional lenders Citizens Financial (NYSE:) Corp. and US Bancorp (NYSE:) were the laggards of the pack.

Goldman Sachs had the highest proportion of losses on commercial real estate loans. State Street (NYSE:) posted the highest capital ratio of the globally systemically important banks.

The $541 billion in total projected losses included over $100 billion in losses from commercial real estate and residential mortgages, and $120 billion in credit card losses, the Fed said.

Lenders will now be allowed to return excess capital to shareholders, although analysts expect payouts to be slightly lower this year due to economic uncertainty and impending new capital rules.

Lenders will be able to announce their share buyback and dividend plans after close of trading on Friday, Fed officials said.

Under the annual test established following the 2007-2009 financial crisis, the Fed assesses how banks’ balance sheets would fare against a hypothetical severe economic downturn.

This year’s test follows the collapse of Silicon Valley Bank and two other regional lenders earlier this year. Those banks found themselves on the wrong end of Fed interest rate hikes, suffering large unrealized losses on their U.S. Treasury bond holdings which spooked their uninsured depositors.

That crisis put the spotlight on the performance of mid-sized and regional lenders, who managed to stay above required capital levels but posted some of the lowest capital cushions.

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