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Biggest US banks clear first hurdle in Fed's annual stress tests

Biggest US banks clear first hurdle in Fed's annual stress tests”

The Fed was yesterday also scheduled to publish the results of annual stress tests for major banks, which are called for under Dodd-Frank and meant to make sure lenders are on solid capital footing in the event of a crisis.

Stock analysts and investors expected banks to hold up well in this year's test because they have accumulated a lot more capital since the financial crisis abated and the economy rebounded.

In this scenario, loan losses would amount to US$383 billion over nine quarters. The Fed said the losses would reduce the banks' high-quality capital from 12.5 percent of its loans in the fourth quarter a year ago to 9.2 percent at the end of 2017.

Powell said this week the Fed would be open to reasonable changes to the law, including the threshold for including banks in the stress tests.

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The biggest U.S. banks' own estimates for loan losses were more optimistic than the Fed's - a trend that has arisen in past years as well.

In the testimony, Federal Reserve Governor Jerome Powell noted that many smaller banks have faced higher costs in order to meet the complex requirements imposed by Dodd-Frank.

The results are the first since Republican President Donald Trump took office and called for a relaxation of capital regulations to encourage banks to lend more. Shareholders of the fourth-largest US bank have been clamouring for management to buy back more of its stock, which is trading below what its assets are worth.

USA banks passed the first round of stress tests issued by the Federal Reserve to determine whether the banks could survive potential recessions, according to CNBC.

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Goldman Sachs Group's projected loan-loss rate of 8.1 per cent was surpassed only by commercial lenders or card issuers such as American Express, Capital One Financial Corp, and Discover Financial Services. Stress tests are simulations regulators run to gauge a bank's ability to weather a downturn. Wells Fargo's metric also fared better in its own test than under the Fed's, by 0.8 of a point.

The results released on Thursday are the first of a two-part exam.

In last year's second round, the Fed barred USA businesses of two European banks, Germany's Deutsche Bank and Spain's Santander, from raising dividends or boosting stock buybacks. "The reason we need to reform ourselves is because we believe in an independent central bank subject to the oversight of Congress and the selection of the president".

The central bank should consider adjusting regulations "in common-sense ways that will simplify rules and reduce unnecessary regulatory burden without compromising safety and soundness", Powell said in prepared remarks released on Wednesday. But the bank can not do so without the Fed's approval.

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