In the aftermath of the collapse of the three largest banks in U.S. history a year ago, the Federal Reserve (Fed) has confirmed that the country’s largest banks have sufficient capital to withstand considerable stress. The Fed reported in its annual stress test that the 31 largest banks in the country could endure losses totaling approximately $68.5 billion from credit card debt, commercial loans, and commercial real estate.
The two-year simulation scenario predicted a 55% stock market crash, a 40% decline in commercial real estate values, and an unemployment rate rising to 10%. Despite all banks on the list having adequate capital to withstand financial turmoil, the Fed noted increased risks on this year’s bank balance sheets due to rising credit card balances, tightened credit limits, and increased risk in corporate loan portfolios.
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“Although the severity of this year’s stress tests was similar to last year’s, higher bank balance sheet risks and costs led to increased losses,” stated the Federal Reserve. They also indicated that the purpose of the tests was to ensure banks have enough capital to absorb losses under extreme stress, and the results demonstrate they have indeed achieved this goal.
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