In order to the asses’ ability of banks in the United States to cope up with the next potential economic crisis, Federal Reserve, the U.S. central bank conducted ‘stress test’. All 31 U.S. federal banks have cleared the challenge. The banks have enough capital to lend during harsh global recession, central bank informed on Thursday.
The central bank introduced stress tests back in 2009. For the first time all banks have the capital amount above of minimum limit. The Goldman Sachs Group Inc. restricted its room to return capital to shareholders by surpassing 8 percent minimum for total risk- based capital by 0.1 average points.
The annual effort by the Federal Reserve is done by using hypothetical cases instead of forecast. Its aim is to prevent events like 2008 financial crisis and judge ability of banks to face such catastrophic event.
Ahead of publication of the second stage of stress test, these results have created a buzz in the media. The second stage will decide about the shareholder payouts such as dividend. Many banks plan to go ahead with an increase in shareholder payouts.
The bank,which won’t be able to clear the second can face restrictions in buying back stock. Federal reserve chairman Janet Yellen while responding to criticism said,” To avoid the trap of ‘regulatory capture’, the central bank is working hard. We are also reducing the risk of bank examiners getting cozy with the firms they oversee.”
Among the six largest banks, Bank of America Corp was the only one to perform better in each capital measure as compared to its result in the last test. The ratio of the Morgan Stanley’s in three capital measure fell down to within 1 percentage point of the required minimum.
Activities like mortgages and credit cards will have up to 39 percent loss as per latest projections. Federal Reserves are using the full potential of stress tests as a tool to check the health of banks.