LONDON/WASHINGTON (Reuters) -The U.S. branches of major European banks like Deutsche Bank (ETR: DBKGn), Barclays (LON: BARC), and Credit Suisse passed the Federal Reserve’s annual “stress tests” on Thursday, showing they have enough capital to handle an economic shock.
The average capital ratio remained significantly higher than the regulatory minimum of 4.5 percent.This is a measure of how much cushion a bank has to handle possible losses.
Reuters looked at the results and found that it was also higher than the average ratio for the group of 34 banks that were tested.
The average capital ratio for the seven European banks was 15.2%, while the average capital ratio for the other 34 banks was 9.7%.
With a ratio of 22.8%, Deutsche Bank’s U.S. operations had the highest ratio of all the banks. Credit Suisse came in third with a ratio of 20.1%. With a ratio of 7.7%, HSBC lagged behind the rest of the foreign banks.
In its annual stress test, which started after the financial crisis of 2007–2009, the Fed looks at how banks’ balance sheets would do in a made-up scenario of a very bad economic downturn. Based on the results, banks can figure out how much capital they need to be healthy and how much they can give back to shareholders.
In a very bad scenario for this year, the economy shrank by 3.5%, which was partly caused by a drop in the value of commercial real estate assets, and the unemployment rate jumped to 10%.
The other four European subsidiaries that were checked were: UBS America Holdings, Santander (BME: SAN) Holdings USA, and BNP Paribas (OTC: BNPQY) USA.
Despite the fact that the scenarios were developed before Russia invaded Ukraine and inflation spiked sharply, the tests should demonstrate to policymakers that Europe’s top banks are strong enough to handle a possible recession this year or early in 2023.
This month, the Bank of England said it was happy that lenders were no longer “too big to fail.” However, it did ask for more information about how much money three big banks, including HSBC, would need if they had to shut down in a future crisis.
The next EU-wide stress test is scheduled to be done by the European Banking Authority in 2023. However, investors are on high alert for signs of a drop in the quality of assets at European banks as borrowing rates start to go up from all-time lows.
In 2020, the Fed changed the way the test works by getting rid of the “pass or fail” system and replacing it with a more complex capital regime.
Here is a link to an explanation of the stress tests:
