Published: Fri, June 23, 2017
Markets | By Lucia Cruz

Biggest US banks clear first hurdle in Fed's annual stress tests

Biggest US banks clear first hurdle in Fed's annual stress tests

The results portrayed a picture of increasing resilience in the banking sector, with the 34 participating firms having added $750 billion in common equity capital since 2009.

"The nation's largest bank holding companies have strong capital levels and retain their ability to lend to households and businesses during a severe recession", said the Fed in a statement on Thursday.

In the past, some banks have been forced to reel back those plans in order to further build capital strength.

Rejoice! Fed Stress Test Day is upon us! Analysts had expected USA banks to make a strong showing in this year's test.

The tests were put in place after the financial crisis to strengthen financial capacity in the event of a downturn. And two, whether firms are good at identifying and measuring risk when they craft their plans. Among other conclusions: Bank of America Corp. would suffer a US$26.4 billion hit to its pretax profit under that scenario, the most of any lender.

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Almost nine years on, banking industry profits have been steadily rising and banks have been lending more freely.

Each year, regulators tweak the exam to keep banks on their toes. Even one of the tests' staunch champions, former Fed Governor Daniel Tarullo, said before he stepped down in April that it might be time to ease up on the qualitative side of the test for Wall Street banks, as the Fed already did for mid-size lenders. The second round, however, uses different criteria, so that solid results from Thursday do not automatically signal that all the plans will be approved. It was the third straight year that the Fed rejected the plan of the US division of Santander, which is one of Europe's biggest banks, and the second straight rejection for Deutsche Bank Trust Corp., the USA transaction bank and wealth management business of Germany's largest bank.

Analysts say Citigroup Inc (C.N) has the most to gain or lose in the stress tests. The president also will be able to appoint a new Fed chair when Janet Yellen's term expires in February. Strong numbers show banks have learned how to position their portfolios to pass tests, and not necessarily lend as much as possible, said Karen Shaw Petrou, managing partner at Federal Financial Analytics Inc. They then ask what that would do to a bank's balance sheet.

FILE - This Monday, July 18, 2016, file photo shows the top of a Bank of America ATM booth, in Woburn, Mass.

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