Federal Reserve sees U.S. banks prepared for a recession

U.S. banks have high levels of capital and are prepared to face a very adverse economic scenario, according to stress tests conducted by the Federal Reserve and published on Thursday. Among the banks that score higher is Santander’s U.S. subsidiary, which would even generate capital in a global recession scenario, according to the stress test results.

“Banks continue to have strong capital levels, enabling them to continue lending to households and businesses during a severe recession,” the Fed says. Such tests are even more important this year, given the risk that the economy will indeed go into recession, as Fed Chairman Jerome Powell admits.

All banks tested remained above their minimum capital requirements, despite total expected losses of $612 billion (about 579 billion euros). Under stress conditions, the core capital ratio-which provides a cushion against losses-is expected to decline by 2.7 percentage points to a minimum of 9.7%, which is still more than double the minimum requirement, the regulator notes.

The tests measure the resilience of large banks by estimating their levels of capital, losses, income and expenses under hypothetical scenarios over nine future quarters. This year’s hypothetical scenario is, according to the Fed, tougher than the 2021 test, and includes a severe global recession with substantial stress in commercial real estate and corporate debt markets. The unemployment rate rises by nearly 6 percentage points to a high of 10% and GDP declines commensurately. Asset prices fall sharply, with commercial real estate prices down nearly 40% and equity prices down 55%.

The 33 banks under examination started with a core capital level of 12.4% and would emerge from the recession at 10.3% after hitting that low of 9.7%. Eight banks would see their capital fall below 8%, including Bank of America and Wells Fargo, two of the largest U.S. institutions. Citigroup would have a low of 8.6% at the worst moment.

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Santander’s subsidiary in the country is one of the few banks that would even generate capital throughout a hypothetical recession. Already starting from a capitalization level among the highest, 18.8%, it would only fall to a low of 18.7% and would emerge from the recession with 18.9%, according to the results published by the Federal Reserve. Santander would end a hypothetical recession with the fourth highest level of capital of the 33 banks examined, behind only broker Charles Schwabb and the U.S. subsidiaries of Credit Suisse and Deutsche Bank.

In the past, Santander has struggled a bit in Federal Reserve examinations. One of Ana Botín’s priorities when she became chairman of the bank was to repair that situation, strengthen capital, improve relations with supervisors and get the U.S. business, which has become one of the group’s main sources of profit, back in shape.

Each bank’s results in the stress test are taken into account when setting a bank’s capital requirements. The Federal Reserve requires sufficient capital to survive a severe recession. If a bank fails to stay above its capital requirements, it is subject to automatic restrictions on capital distributions and discretionary bonus payments.