That would indicate a major change in confidence on the part of both banks and regulators as the institutions would begin actually reducing capital positions.
“Today’s results reaffirm that U.S. banks are strong and remain well positioned to continue playing their important role in accelerating economic growth,” Rob Nicholas, president of the American Bankers Association, said in a statement. “Banks’ robust capital and liquidity positions would allow them to continue to function well under even the most extreme scenarios.”
Fed officials emphasized that the stress tests don’t come with “pass” or “fail” though the results bode well for banks passing the second part of the test next week. The second round, however, uses different criteria, so that solid results from Thursday do not automatically signal that all the plans will be approved.
But in terms of whether the banks have enough top-quality assets compared to liabilities, Thursday’s results indicated that the institutions were on safe ground. That measure, called the tier-one capital ratio, was exceeded by all 34 banks. As a whole, the industry would see its current tier-one ratio fall from 12.5 percent to 9.2 percent. For individual banks, the Fed requires a level of 4.5 percent.
Under the most severe scenario, which also entails heightened stress in corporate loan markets and 35 percent decline in commercial real estate prices, banks are projected to lose $493 billion over a period of nine quarters.
In addition, the eight largest firms would see $86 billion in trading losses, with JPMorgan Chase, the biggest bank by assets, suffering the biggest losses at $25 billion.
The results come at a time when Washington lawmakers are looking at rolling back some of the Dodd-Frank measures. A Republican-sponsored measure would reduce the authority that regulators have and raise the level of assets for which banks would undergo the type of scrutiny that the stress tests employ. The Fed uses $50 billion as the current yardstick, but some legislators would like to raise the level to about $250 billion.
A Fed official said Thursday that the results show the industry is well-capitalized and credited the reforms with boosting lending for banks.
Bank stocks traded broadly lower Thursday and have been sideways since getting a big boost after Trump’s November election victory.
— CNBC’s Wilfred Frost and Dawn Giel contributed to this report.