All but one of the US’ 30 largest banks are now strong enough to weather another severe economic crash, the Federal Reserve says.
In the newest of the series of health examinations mandated after the 2008 financial crisis, only Zions Bancorp could not measure up to a basic capital standard in a theoretical drastic meltdown of the economy.
Twenty-nine bank holding companies held up in the worst-case scenario with a cumulative 7.8 per cent Tier 1 common ratio, a basic measure of capital strength, down from 11.5 per cent at the end of the third quarter last year, but ending well above the 5.0 per cent minimum target.
That represented a steady strengthening of the sector since the tests began three years ago,
Salt Lake City, Utah-based Zions Bancorp was the only one which fell below the threshold, finishing the nine months of the theoretical meltdown period with just a 3.5 per cent Tier 1 common ratio — the level of shareholder equity and reserves.
The banks were measured against a situation when real gross domestic product contracts 4.75 per cent, the unemployment rate hits 11.25 per cent, equities shed half their value and home prices lose a quarter of their value.
In that scenario, banks saw $US501 billion ($A555.40 billion) in losses over nine months.
“The severely adverse scenario features a deep recession in the United States, Europe, and Japan, significant declines in asset prices and increases in risk premia, and a marked economic slowdown in developing Asia,” the Fed report said.
The scenario also included for the eight largest banks a default by their own largest counterparty.
The banks that held up the best included American Express, Bank of New York Mellon, Fifth Third Bank, Northern Trust and State Street. All ended the tests with core capital far above the industry average.
Frank Keating, president of the American Bankers Association, said the tests showed that banks continue to strengthen.
“Regulators threw every economic calamity they could think of at our nation’s largest banks, and these institutions once again proved their ability to handle even the most extreme financial distress,” he said in a statement on Thursday.