The US central bank has been stress-testing retail banks in response to significant banking failures that occurred earlier this year. The aim is to evaluate the resilience and stability of these banks following those high-profile collapses.
According to the American central bank’s “stress tests,” all 23 of the largest banks in the country have been deemed capable of withstanding a severe recession. In simpler terms, the central bank has determined that these banks have the ability to survive and remain stable during a challenging economic downturn.
According to the report released on June 28, midsize and regional banks demonstrated some weaknesses. However, it’s important to note that the stress test only mandated participation from the 23 largest banks in the country.
The list specifically includes the country’s biggest lenders. In simpler terms, the report found weaknesses among midsize and regional banks, but only the 23 largest banks were required to undergo the stress test.
Following the banking crisis, Federal Reserve policymakers hinted at the possibility of more rigorous stress testing in the future. Fed vice-chair Michael Barr emphasized the importance of acknowledging risk emergence and working towards resilient banks capable of withstanding economic scenarios, market shocks, and other stresses.
In simpler terms, policymakers at the Federal Reserve suggested tougher stress testing after the banking crisis. Michael Barr, the vice-chair, highlighted the need to recognize risks and ensure banks are strong enough to handle various challenges.
Bank stress tests have been conducted annually since the 2008 financial crisis, which originated from U.S. banks. The Federal Reserve examines the potential impact of high unemployment rates and significant economic contraction on the banking industry, assessing the severity of potential losses.
In simpler terms, stress tests are performed each year to evaluate how U.S. banks would fare in a severe economic downturn characterized by skyrocketing unemployment and substantial contraction in economic activity.
Fed stress test: 40% drop in commercial property prices, 38% drop in home prices, 10% unemployment. 23 largest banks projected $541 billion losses.
The 23 banks participating in Fed stress. Source: federalreserve.gov
Fed requires banks to maintain a stressed capital ratio of at least 4.5% for passing. Earlier this year, notable collapses of banks like Silicon Valley Bank, Signature Bank, Silvergate Bank, and First Republic Bank occurred, while others like PacWest and Western Alliance faced instability. Capital ratios indicate a bank’s financial strength.
The Fed has been providing assistance to smaller banks this year through its Bank Term Funding Program (BTFP) established in March.
According to Federal Reserve data, over $100 billion has been allocated to support struggling small and mid-sized banks.
Important: Please note that this article is only meant to provide information and should not be taken as legal, tax, investment, financial, or any other type of advice.
Follow Cryptos Headlines on Google News
Join Cryptos Headlines Community
