Fed stress tests show banks could withstand a deep downturn

The nation’s biggest banks have “strong” levels of capital and would be able to keep lending even during a severe recession, the Federal Reserve said Thursday.

The central bank released the results of the first part of its annual “stress tests” mandated by Dodd-Frank legislation. The second set of results, which outline which banks may return capital to investors, are due next week.

The 34 banks tested would have losses of $383 billion under what the Fed calls a “severely adverse” scenario: a 10% unemployment rate, stressed loan markets, and a drop of 35% in the commercial real estate market.

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. Both that measurement and their starting point of capital, before the hypothetical scenario kicks in – 12.5% – are higher than in 2016.

This year, the Fed tested 34 banks, one more than last year. CIT Group












CIT, +0.08%










  participated in the testing for the first time, but as a small institution, a Fed official said the central bank does not believe it skewed the results to look more rosy than in 2016.

Last year, all but two banks – Deustche Bank












DB, -0.95%










  and Banco Santander












SAN, -0.46%










  – passed the second round of testing and were allowed to pay out capital.

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The Fed changes the adverse scenario to which banks must test each year, in order to ensure the institutions can react to unknown situations. Under this year’s scenario, the banks’ credit card portfolios would take the biggest hit, in part because the higher unemployment rate would hurt consumers, and in part because banks are already starting to see some delinquencies in credit card lending, a Fed official told reporters.

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