U.S. Banks Pass Annual Stress Test

America’s major commercial banks, which include JPMorgan Chase (JPM) and Citigroup (C), have passed the annual stress test administered by the U.S. Federal Reserve.

A total of 31 U.S. banks were found to be able to withstand a severe recession while maintaining their ability to lend to consumers and businesses, said the Federal Reserve.

In a news release, the Fed said that each bank tested would be able to absorb substantial losses while maintaining more than the minimum capital levels.

This year’s stress test assumed that unemployment across America rose to 10%, commercial real estate values fell 40%, and housing prices declined 36%.

“This year’s results show that under our stress scenario, large banks would take nearly $685 billion in total hypothetical losses, yet still have considerably more capital than their minimum common equity requirements,” said the U.S. central bank in its news release.

The annual stress test forces lenders to maintain adequate financial reserves to cover potentially bad loans and dictates the size of share repurchases and dividends at the banks.

In addition to national and regional banks, the stress test also includes major credit card companies such as American Express (AXP) and Visa (V).

In a change, the Fed this year also performed an “exploratory analysis” of funding stresses and the impact of a stock market meltdown on the eight biggest banks in the U.S.

In the scenario, where five large hedge funds implode and cause extreme stock market volatility, the biggest American banks would lose between $70 billion U.S. and $85 billion U.S.

“The results demonstrated that these banks have material exposure to hedge funds but that they can withstand different types of trading book shocks,” said the Fed.

Following the conclusion of the stress test, U.S. banks are expected to announce their share repurchase plans and dividend payments.

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