Federal Reserve Reveals Banks Could Lose Over $500 Billion in Severe Scenario
The Federal Reserve has released the results of its annual bank stress test, revealing that large US banks would be able to survive a severe recession. However, the test also showed that 23 major banking institutions, including JPMorgan Chase, Bank of America, and Wells Fargo, could lose a staggering $541 billion under the “severely adverse” scenario.
The losses are broken down as follows: $424 billion in loan losses, accounting for 78% of the total losses; $18 billion in additional losses from items such as loans booked under the fair-value option, accounting for 3% of the total losses; $94 billion in trading and counterparty losses at the 11 banks with significant trading, processing, or custodial operations, accounting for 17% of the total losses; and $5 billion in securities losses, accounting for 1% of the total losses.
Despite the substantial potential losses, the Federal Reserve’s analysis of the stress test struck an optimistic tone. The report stated that “all 23 banks tested remained above their minimum capital requirements during the hypothetical recession, despite total projected losses of $541 billion.”
The stress test scenario used in this year’s analysis included a severe global recession, with a 40% decline in commercial real estate prices, a substantial increase in office vacancies, and a 38% decline in house prices. It also assumed a 6.4% rise in the unemployment rate, peaking at 10%, and a corresponding decline in economic output.
Investors should note that the stress test results are not a guarantee of future performance, but they offer insight into the strength and resilience of America’s banking system. It is crucial for investors to conduct their due diligence before making any high-risk investments.
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