The nation’s major banks are in good shape and can withstand a severe economic contraction, the Federal Reserve determined Thursday.
The 33 largest banks received a passing grade from the Federal Reserve following the latest annual “stress tests.”
This year’s scenario was being able to handle an unemployment rate that would more than double to 10%, a severe contraction in commercial real estate and stock market values that could cause losses of more than $600 billion.
Even in with those variables, the banks would still, on average, have a capital ratio 9.7%, well above the 4.5% required by law, the Fed said. Capital ratios are used as a measure of how strong a cushion a bank holds against unexpected losses.
Passing these tests are a requirement before they can start paying out shareholders dividends and buying back shares.
Banks will announce their plans for dividends and buybacks on Monday.
The tests vary from year to year, but generally involve the Fed testing to see how steep the losses in the banking industry would be if unemployment were to skyrocket and economic activity were to severely contract.
The “stress tests” have become an annual report card for the nation’s financial system following the Great Recession and 2008 financial crisis.
The Associated Press contributed to this report.