Fed: Biggest US banks strong enough to withstand recession

The Federal Reserve released initial results of its yearly stress tests to determine whether the nation's banks are financially strong enough to weather a severe recession

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America's big banks are a step closer to paying billions of dollars to shareholders after the Federal Reserve determined that their cash reserves were large enough to withstand a severe shock to the U.S. economy.

"Today's results reaffirm that USA banks are strong and remain well positioned to continue playing their important role in accelerating economic growth", said ABA President and CEO Rob Nichols.

Other banks serving the Triad required to conduct the stress test are Bank of America Corp., Fifth Third Bancorp, PNC Financial Services Group Inc., SunTrust Banks Inc. and Wells Fargo & Co.

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"The nation's largest bank holding companies have strong capital levels and retain their ability to lend to households and businesses during a severe recession", said the Fed in a statement on Thursday. Bank executives and many investors hope the Fed will allow lenders to put a lot more capital toward stock buybacks and dividends. During the crisis, the government created a $700 billion bailout fund to stabilize hundreds of banks, large and small, across the U.S.

The latest downturn scenario includes: the USA unemployment rate peaking at 10 percent in the third quarter of 2018 - up from 4.3 percent in May; a 49.7 percent decline in the Dow Jones Industrial Average; a decline in home prices of 25.7 percent and a 34 percent decline in commercial real-estate prices, both between now and December 31, 2018; an increase in 30-year mortgage rates to 4.6 percent; and an inflation rate of 1.4 percent in 2017 and 1.8 percent in 2018. The tests compare the losses projected for each bank with its capital. Banks now have an opportunity to resubmit those plans if they find their own projections were much sunnier than the Fed's.

The combined loan losses would be $383 billion. That measure, called the tier-one capital ratio, was exceeded by all 34 banks.

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The banks have built up deeper cushions against such a downturn since the 2008 financial crisis, and would maintain a 9.2% ratio of capital as a share of assets under such a scenario, the Fed said.

Since 2009, the almost three dozen firms have added more than $750 billion in capital to their coffers. The Fed has also seen the tactic as a way to poke around bank balance sheets for weak assets. This was the first year that all the country's big banks passed since the recession.

The tested banks included Bank of America, JP Morgan Chase, Wells Fargo, Morgan Chase and the Deutsche Bank Trust Corp, a United States unit of the troubled German financial giant.

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