US banks have high levels of capital and are prepared to face a very negative economic scenario, according to stress tests conducted by the Federal Reserve and published on Thursday. Among the banks with a better score is the US subsidiary Santander, which would generate capital in a global recession scenario, according to stress-test results.
“Banks continue to have strong capital levels, allowing them to continue lending to households and businesses during a severe downturn,” the Fed says. These tests are even more important this year, given the risk of the economy already entering a recession, admits Jerome Powell, Fed chair.
All banks tested remained above minimum capital requirements, despite total expected losses of $612 billion (about €579 billion). Under stressful conditions, the core capital ratio — which provides protection against losses — is expected to fall by 2.7 percentage points to 9.7%, which is still more than double the minimum requirement, the regulator notes.
The tests measure the resilience of large banks by estimating 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 harsher than the 2021 test scenario, and includes a severe global recession with significant pressure on corporate debt and commercial real estate markets. The unemployment rate rises by about 6 percentage points to a maximum of 10% and GDP falls proportionately. Asset prices fell sharply, with commercial real estate prices down nearly 40% and stock prices down 55%.
The 33 banks under review started with a core capital level of 12.4% and will come out of the recession by 10.3% after hitting that low of 9.7%. Eight banks will see their capital drop below 8% at the worst moment, including Bank of America and Wells Fargo, two large US entities. Citigroup will have a minimum of 8.6%; Goldman Sachs 8.4%, and JPMorgan Chase 9.8%, according to the report published by the Federal Reserve.
Santander celebrates his results
The Santander subsidiary (Santander Holdings USA, SHUSA) in the country is one of the few banks that might even generate capital during a hypothetical recession. Already part of the top capitalization level, which is 18.8%, will only fall to a minimum of 18.7% and will come out of recession already by 18.9%, according to the results published by the Federal Reserve. It is the second bank to suffer the least amount of capital deterioration at the worst moment of a serious crisis, by just 0.1 point. It is second only to Charles Schwab, a company that focuses its business on stockbroking. In addition, SHUSA will end a hypothetical recession with the fourth-highest level of capital for the 33 banks examined, after Charles Schwab and US subsidiaries of Credit Suisse and Deutsche Bank.
Santander has struggled in the past in Fed tests. One of the priorities of Anna Putin when she became head of the bank was to restore this status, strengthen capital, improve relations with supervisors, and put American business into shape, which became one of the main sources of profit for the group.
Santander Holdings USA believes that the stress test results demonstrate its resilience, the strength of its business model and its capital position. The results indicate that SHUSA can remain well invested in times of intense market stress. The company’s robust capital planning process is designed to ensure efficient use of capital while maintaining a long-term approach to capital allocation and distribution.
The results of each bank in the stress test are taken into account when determining the capital requirements of the bank. The Federal Reserve needs enough capital to survive a severe recession. If the bank does not remain above its capital requirements, it is subject to automatic limits on dividend payments, capital distributions and discretionary bonus payments.