According to the app Intelligent Finance, on Wednesday the Federal Reserve announced that the annual bank stress test results show the largest banks in the USA have sufficient capital to withstand economic disasters. However, it also points out that risks on banks' balance sheets are increasing.

This highly anticipated test places the banks in a series of theoretical and severe financial system shocks, and the results show that large banks still have capital exceeding the minimum common stock requirement set by regulatory agencies after bearing a total of approximately US $685 billion in hypothetical losses.

Michael Barr, the Vice Chairman for Supervision of the Federal Reserve, stated that although this year’s test severity is similar to that of last year, the theoretical loss is higher this year because 'risks on banks' balance sheets are increasing, and costs are also higher.' The loss for 2023 is $541 billion.

Barr stated in a statement on Wednesday that 'Although banks have the ability to withstand specific assumed recessions tested by us, the stress test also confirms certain areas of concern.'

The Federal Reserve pointed out that the increased balance and delinquency rates of bank credit cards led to an increase in expected credit card losses. The combination of increased corporate credit card portfolio risks, increased costs, and decreased fee income are the reasons for these losses.

This year, the Federal Reserve tested the largest 31 banks in the USA, including JPMorgan, Bank of America, and Wells Fargo & Co., as well as medium-sized regional lending institutions like Regions Financial and Fifth Third Bancorp.

This year's hypothetical scenario is roughly the same as that of 2023, including a severe global economic recession, a 40% decline in commercial real estate prices, a 36% decline in house prices, and an increase in unemployment to 10%.

Under these hypothetical conditions, the common stock tier 1 capital ratio of banks will drop by 2.8 percentage points to 9.9% from 12.7%. The Federal Reserve stated that this is a greater decline than the 2.5 percentage points in the previous year, but the same as the recent stress test range.

The annual stress test results of the Federal Reserve are closely watched by analysts and investors because they depict how the largest banks in the USA perform in severe economic downturns, and these banks are the objects of dependence for businesses and consumers to obtain credit and other needs.

These tests were created after the 2008 financial crisis to help determine how much capital banks need to hold to withstand economic downturns. In turn, they also indicate whether and to what extent banks can increase dividends and share buyback plans paid to shareholders.

The emergence of these results coincides with a major adjustment by US financial regulators to their requirements for large banks to hold capital on their balance sheets, an effort that has been widely opposed by lenders. However, industry insiders expect that regulators will ultimately soften their initial proposals in a more friendly manner towards large banks.