U.S. banks prepared to withstand severe recession, says Fed

Washington, June 23. The finances of large U.S. banks are sufficiently healthy to face a severe recession scenario, the Federal Reserve (Fed) said Thursday.

The U.S. central bank published a report with the results of its annual bank stress tests, according to which the 34 largest financial institutions in the country could face a severe economic downturn.

The possibility of the U.S. economy entering a recession is growing, especially after the Fed began enacting aggressive interest rate hikes to combat high inflation, a move that can be effective in lowering prices but can also lead to a slowdown in economic activity.

“Banks continue to have high levels of capital, which would allow them to continue lending to households and businesses during a severe recession,” the report said.

The Fed explained that the 34 banks evaluated remained above minimum capital requirements, despite total hypothetical losses of $612 billion in the event of a severe recession.

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In that scenario, the aggregate ratio of capital to common equity, which provides an extra cushion against possible losses, would fall by 2.7 percentage points to a minimum of 9.7%.

This 9.7%, however, would still be more than double the required minimum, the Fed said.

The hypothetical scenario designed by the central bank this year was more severe than the one for 2021, and included a global recession with substantial impacts on the housing and corporate debt markets.

In this scenario, unemployment would rise by 5.75 percentage points in the U.S. to a total of 10% and Gross Domestic Product (GDP) would fall considerably.

All U.S. banks with more than $100 billion in assets are subject to stress tests under the Dodd-Frank Act, which saw financial reform in 2010 following the 2007-2008 crisis.

Among the entities undergoing these tests are Bank of America Corporation, Barclays US LLC, Capital One Financial Corporation, Citigroup Inc, Credit Suisse Holdings (USA), The Goldman Sachs Group; HSBC North America Holdings, and JPMorgan Chase & Co.

The possibility of the U.S. entering a recession is something that economists are increasingly speculating about, although the government headed by Joe Biden assures that it is not inevitable and the Fed itself reiterates time and again that it will try to contain price rises by affecting economic activity as little as possible.

This same Thursday, in an appearance before the Financial Services Committee of the U.S. House of Representatives, Fed Chairman Jerome Powell did not rule out that interest rate hikes to reduce inflation could lead to an increase in unemployment.

“There is a risk that unemployment will rise, relative to what has been a historically low level,” he said.

Although the U.S. central bank president assured that it is “certainly possible” to keep inflation under control without causing a loss of employment, this may not happen in the end.

In the middle of this month, the Fed announced a 0.75-point increase in the official interest rate, the largest increase in 28 years, and anticipated that another 0.75 or 0.5-point increase would most likely take place in July to fight inflation.

Days earlier, inflation data had been published in the country, which soared in May to its highest rate in the last 40 years, 8.6%, a new escalation in consumer prices, driven mainly by the sharp rise in energy prices.

In his appearance, Powell explained that the rate hikes “are designed to reduce growth to a level that is more sustainable”, but admitted that the central bank does not have “precise tools” and that this could lead to job losses.

In May, the U.S. economy added 390,000 new jobs, down slightly from the more than 400,000 new jobs that had been created each month over the past year.

The unemployment rate remained at 3.6% last month, the same as in April and March, despite expectations that it would finally reach the 3.5% of February 2020, before the start of the economic crisis due to the covid-19 pandemic and a 50-year low. EFE

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