Bank Stress Test: US Banks well positioned for severe recession

The biggest US banks have enough capital to survive an economic disaster, according to the Fed’s annual bank stress test, but their position is weaker than it was a year ago. The purpose of the tests, which gained additional significance following the failure of three US banks last year, was to keep an eye out for any indications of potential flaws in the financial system.

The 31 banks that have to participate in the stress test would lose $685 billion, which is $144 billion more than what was found in the stress test conducted last year. Fed Vice Chair for Supervision Michael Barr said that banks have increased their risk-taking while also raising their costs, which is why the overall losses are larger.

Banks are under more strain than they were a year ago due to credit card debt, which recently reached a record high, and an increase in the number of people making late payments. Additionally, banks had less of a buffer to absorb those losses because their fee income was reduced.

At 18.7%, Discover Financial Services experienced the highest loan loss rate, followed by Capital One at 16.5%. The Fed and the Office of the Comptroller of the Currency, who are scheduled to meet together over the planned acquisition next month, must approve the acquisition of Discover and Capital One. Both firms’ shares decreased in after-hours trade on Wednesday after the stress test results were announced at 4:30 p.m. ET.

The Fed modifies the stress capital buffers for large banks using the stress test as a tool. After the Fed releases its findings, banks usually release statements regarding the stress test results. The economic situations remained largely the same in 2024, although this year’s fictitious economic storm had a greater impact on bank balance sheets.