Large banks could lend money in severe recession

The largest bank holding companies in the United States have strong capital levels and can lend to homes and businesses in a severe recession, according to supervisory bank stress tests.

On Thursday (June 22), the Federal Reserve Board released results of the tests. This is the seventh round of tests since 2009, and the fifth round required by the Dodd-Frank Act. This round of testing included 34 bank holding companies, with $50 billion or more in total consolidated assets, representing more than 75% of all the assets of U.S. bank holding companies.

The most severe test involved $383 billion in loan losses at the 34 banks, over the nine quarter testing period. “The ‘severely adverse’ scenario features a severe global recession with the U.S. unemployment rate rising by approximately 5.25 percentage points to 10%, accompanied by heightened stress in corporate loan markets and commercial real estate,” according to the Federal Reserve Board.

In the hypothetical test, the banks’ ratio of common equity capital, which compares high-quality capital to risk-weighted assets, would decline to a minimum level of 9.2%, from an actual 12.5% in the fourth quarter of 2016. The banks have added more than $750 billion in common equity capital since 2009.

“This year’s results show that, even during a severe recession, our large banks would remain well capitalized,” Governor Jerome Powell said. “This would allow them to lend throughout the economic cycle, and support households and business when times are tough.”

In the event of a more moderate recession, common equity capital for the 34 banks would fall to a minimum level of 10.7%.