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The Federal Reserve sees US banks as prepared for a recession

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US banks are highly capitalized and ready to face a very unfavorable economic scenario, according to the stress tests conducted by the US Federal Reserve and published this Thursday. Among the better-rated banks is Santander’s US subsidiary, which according to the results of the stress tests would generate capital even in a global recession scenario.

“Banks remain well capitalized, allowing them to continue lending to households and businesses even in a severe downturn,” says the Federal Reserve. These tests are all the more important this year as the economy is indeed slipping into a recession, as Fed President Jerome Powell has acknowledged.

All banks tested remained above their minimum capital requirements, despite expected total losses of US$612 billion. Under stressed conditions, the core capital ratio – which provides a buffer against losses – is set to fall 2.7 percentage points to a low 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 in hypothetical scenarios over nine future quarters. This year’s hypothetical scenario, according to the Federal Reserve, is tougher than the 2021 test and includes a severe global recession with significant strains on corporate bonds and commercial real estate markets. The unemployment rate increases by almost 6 percentage points to a maximum of 10% and GDP falls proportionately. Asset prices are falling sharply, with commercial property prices down almost 40% and share prices down 55%.

The 33 banks surveyed started with a Tier 1 capital level of 12.4% and would emerge from the recession at 10.3% after hitting the low of 9.7%. Eight banks would see their capital fall below 8%, including Bank of America and Wells Fargo, two of the big US companies. Citigroup would have bottomed out at 8.6% at its worst moment.

Santander’s subsidiary in the country is one of the few banks that would generate capital even during a hypothetical recession. Even with the tops capping at 18.8%, it would only fall to a minimum of 18.7% and exit the recession at 18.9%, according to results released by the Federal Reserve. Santander would exit a hypothetical recession with the fourth-most capitalized position of the 33 banks surveyed, behind only intermediary Charles Schwabb and US subsidiaries Credit Suisse and Deutsche Bank.

Santander has struggled in Federal Reserve tests in the past. One of Ana Botín’s priorities when she became president of the bank was to restore this situation, strengthen capital, improve relations with regulators and shape the American business, which has become one of the main sources of profit for the cluster is.

The results of each bank in the test of resistance are taken into account when setting a bank’s capital requirements. The Federal Reserve needs enough capital to survive a severe recession. If a bank does not exceed its capital requirements, it is subject to automatic capital distribution and discretionary bonus payment limits.

Source elpais.com

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