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23 June 2017, 04:44 | Ignacio Smith
The largest USA banks collectively showed that they can withstand a severe economic downturn and continued to improve their capital positions, according to the results of Dodd-Frank Act-mandated stress tests the Federal Reserve released today. "This would allow them to lend throughout the economic cycle, and support households and businesses when times are tough".
However, lenders' aggregate levels of high-quality capital would still cover 9.2 per cent of their risk-weighted assets, which is significantly higher than the 4.5 per cent required by regulators and an improvement on last year's 8.4 per cent.
Under the Fed's worst-case stress test scenario, the USA unemployment rate more than doubles to 10 percent.
The first round of the central bank's annual "stress tests" showed that as a group, the 34 big banks have gained strength thanks to a steadily recovering economy.
Powell said this week the Fed would be open to reasonable changes to the law, including the threshold for including banks in the stress tests. Shareholders of the fourth-largest US bank have been clamouring for management to buy back more of its stock, which is trading below what its assets are worth.
The report, which was released by the Treasury Department, recommended giving the president the power to fire the head of the Consumer Financial Protection Bureau, giving Treasury greater power to oversee bank regulators, requiring regulatory agencies to analyze the cost of new rules and stripping the Federal Deposit Insurance Corp. of its responsibility to oversee banks' plans for how they should be unwound if they fail.
Banks coming closest to not meeting the minimum capital ratio were Ally Financial, with a tested level of 6.5 percent; Capital One Financial, with 7.0 percent; Huntington Bancshares, 7.0 percent; KeyCorp, 6.8 percent; and SunTrust Banks, 7.1 percent.
The Fed said that the banks would collectively lose almost half a trillion dollars in its most extreme scenario but they would still be able to lend money. The Fed compiles its own projections of losses and incomes for each bank.
"I don't think what we are talking about here amounts to deregulation", said Federal Reserve Governor Jerome Powell, the central bank's regulatory point man. With $100 billion each, the two categories represent about 52 percent of the total $383 billion in projected loan losses. "They just can't get any money because the banks just won't let them borrow it because of the rules and regulations in Dodd-Frank". This was the first year that all the country's big banks passed since the recession.
The financial industry, and mid-size banks in particular, have complained of the burden the new regulations place on lenders.
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