Fed "Even with 10% Unemployment Rate and 55% Stock Plunge... Major US Banks Can Withstand"

[Asia Economy New York=Special Correspondent Joselgina] Unemployment rate at 10%, stock market plunges 55%, commercial real estate prices drop 40%. Major U.S. banks have been evaluated to have sufficient capital capacity to withstand such worst-case recession scenarios.

According to MarketWatch, on the 23rd (local time), the U.S. Federal Reserve (Fed) released the results of the 2022 stress test assessing the soundness of major banks. This test was conducted on 34 banks including JP Morgan Chase, Bank of America (BoA), Wells Fargo, Morgan Stanley, and Goldman Sachs.

The Fed assumed a scenario in this test where the U.S. unemployment rate rises to 10%, an increase of 5.75%, U.S. Gross Domestic Product (GDP) decreases by 3.5%, commercial real estate prices fall by 40%, and stock prices plunge by 55%. Under these conditions, the average capital ratio of major banks was 9.7%, exceeding the minimum threshold of 4.5%. Although the banks’ potential losses were estimated at $612 billion, they were evaluated to have sufficient balance sheets to continue lending to households and businesses to sustain the economy.

The Fed stated in a release, "This year’s hypothetical scenario model includes a more severe global recession than the 2021 test," and added, "Despite these conditions, (major banks) have the capacity to continue lending to households and businesses."

Banks that pass the test can proceed with shareholder return policies such as dividend payments and share buybacks as planned. The stress test, introduced in 2009 right after the global financial crisis, is a system that evaluates financial institutions’ adequate capital capacity by assuming potential risk scenarios such as recessions.