By Sang Hyun Park
This month, the Federal Reserve released results for the first phase of stress tests on the nation’s top banks and has reported positive results.
The stress tests are designed to find weak spots in banks with more than $50 billion in assets by determining whether they have enough capital to handle adverse market developments. All 31 banks in the category passed the test.
The Fed predicts that the banks would lose $490 billion in the 27 months leading to October 2016. The “severely adverse” conditions that the banks faced in the tests included a 10% unemployment rate, a 25% drop in housing prices, and a 60% market drop resulting in a “notable rise in market volatility.” America’s largest banks, however, have built capital reserves to insulate against losses in response to regulatory capital requirements, and appear to be in good shape to face the challenges.
While all banks passed the test, Goldman Sachs and Zions Bancorp only narrowly satisfied the minimum capital requirements, suggesting a possible vulnerability to the forecasted adverse conditions. The banks are expected to continue increasing capital levels and enhancing risk management capacities in preparation for a possible recession. Possible weak spots within the banking system will become more apparent as the stress tests continue throughout the month. In the meantime, the results of the Fed’s examination will test market confidence in some of the nation’s largest banks.