Major U.S. banks can withstand a possible recession, but would be hurt by Americans’ increased reliance on credit cards, which comes with a higher rate of delinquencies, according to the results of the «stress tests» of the Fed, published Wednesday. The results of banking stress tests, carried out each year, “showed that large banks would suffer greater losses than in last year’s test”, detailed the American central bank (Fed) in a press release. They are nevertheless “well placed to weather a severe downturn and remain above minimum capital requirements”it is specified.
Bank of America, Citigroup, Morgan Stanley, or even Capital One: the Fed compared the liquidity of the 31 largest American banks to the scenario “a serious global recession”, with a 40% drop in commercial real estate prices, a substantial increase in office vacancies, a 36% drop in residential real estate prices, an unemployment rate of 10%, and a fall in economic output. Such a crisis would cause a total of $685 billion in losses for these establishments. They were valued in 2023 at $541 billion; however, the tests only covered 23 banks, with certain establishments only being scrutinized every other year.
“Higher default rates”
This increase in losses is notably due to the “substantial increases in bank credit card balances, combined with higher delinquency rates, (which) have resulted in increased projected credit card losses”, details the Federal Reserve. Moreover, “corporate credit portfolios have become riskier”, and banks therefore project higher losses on the loans granted to them. The Fed also mentions “increasing expenses and decreasing commission income in recent years”.
“The aim of our test is to ensure that banks have enough capital to absorb losses in a very difficult scenario. This test shows that this is the case”commented the Fed’s vice chairman for banking supervision, Michael Barr. The losses that would affect the banks are “more important” than in 2023 “because bank balance sheets are a little riskier and expenses are higher”, he added. Stress tests were put in place by the Dodd-Frank law after the 2008 financial crisis.
