US Banks Face Higher Risks Amid Economic Uncertainty, Fed’s Stress Test Reveals

Last updated: June 27, 2024

facade_of_old_bank_with_columnsAmerica’s top banks are bracing for stormier weather. The Federal Reserve’s annual stress test, released Wednesday, shows they could endure a severe recession while still lending, but they’d face heftier losses compared to last year.

Post-Great Recession, the Fed’s stress tests aim to sniff out financial system frailties. This year’s assessment holds extra weight after last year’s trio of bank collapses shook the sector.

Thirty-one banks took the test, with projected losses totaling $685 billion—up $144 billion from last year. Notably, fewer banks were assessed previously.

Fed Vice Chair for Supervision, Michael Barr, pointed to increased risk-taking and higher expenses as culprits for the spike in losses. Elevated interest rates have upped the ante, making loans riskier and pricier, squeezing bank profits.

Credit card debt has ballooned, hitting a record high and dragging down banks with higher projected losses. Late payments are up, while income from fees is down, leaving banks with a thinner cushion to absorb hits.

“The goal of our test is to help to ensure that banks have enough capital to absorb losses in a highly stressful scenario. This test shows that they do,” Barr said.

Bank Performance Under the Microscope

Despite all banks passing, their performance varied widely under the severe recession scenario.

JPMorgan Chase noted that its losses might be “modestly higher” than the Fed’s estimates, though it didn’t specify how much. The bank fared well overall, with a 6.3% loan loss rate, better than the 7.1% average among the 31 banks.

Discover Financial Services posted the highest loan loss rate at 18.7%, trailed by Capital One at 16.5%. Earlier this year, Capital One announced plans to acquire Discover, pending approval from the Fed and the Office of the Comptroller of the Currency.

Their financials will likely face increased scrutiny following the stress test results. Shares of both firms fell over 2% Thursday morning.

Conversely, Charles Schwab suffered the smallest loan loss rate of 1.3%, with its stock seeing a slight uptick post-results.

In the end, while US banks are equipped to weather economic turmoil, the road ahead looks bumpier than before. The Fed’s findings are a stark reminder: in finance, as in life, it’s wise to prepare for the unexpected.

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Jon Morgan, MBA, LLM, has over ten years of experience growing startups and currently serves as CEO and Editor-in-Chief of Venture Smarter. Educated at UC Davis and Harvard, he offers deeply informed guidance. Beyond work, he enjoys spending time with family, his poodle Sophie, and learning Spanish.
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