On Thursday, the U.S. Federal Reserve unveiled scenarios for its yearly bank health checks, which evaluate how well 32 major lenders would do in the event of a catastrophic economic shock, such as a 10% unemployment rate in the country and a fall in real estate values.
Reduction In Houses Value
After the financial crisis of 2007–2009, the Fed instituted yearly “stress tests,” which set limits on the amount of capital banks can retain and use for dividends and share buybacks.
The most dire scenario for this year is almost consistent with the one from last year. It includes a 40% drop in the price of commercial real estate and a 36% reduction in house values, as opposed to 38% in the 2023 scenario.
The 23 banks who were tested the previous year passed the test with flying colors, demonstrating that even in the extreme downturn scenario envisioned by the Fed, they would still have more than twice the needed capital. They would have lost a total of $541 billion.
Exploratory Analysis
Source- Forbes
Large banks have maintained that the tests demonstrate their wealth and that the capital increases envisioned in the Fed’s “Basel Endgame” plan, which was published last year, are unnecessary.
In addition, this year’s exam will have an additional “exploratory analysis” of the banking system for the first time, evaluating lenders’ ability to withstand a greater variety of risks than in previous years. The Fed stated that capital will not be impacted by the exploratory analysis.
