All US banks clear latest Dodd-Frank stress tests

The Federal Reserve said Thursday that close to three dozen of the largest U.S. banks passed annual stress tests designed to test their ability to survive an array of economic crises.

All 35 bank-holding companies subject to annual Dodd-Frank Act Stress Tests proved that they held enough capital and developed sufficient plans to weather hypothetical financial shocks and recessions modeled by the Fed, the central bank announced Thursday.

“Despite a tough scenario and other factors that affected this year’s test, the capital levels of the firms after the hypothetical severe global recession are higher than the actual capital levels of large banks in the years leading up to the most recent recession,” Fed Vice Chairman of Supervision Randal Quarles said in a statement.

The Fed began stress-testing banks in 2009, two years after the start of the financial crisis that triggered the 2008 recession.

Dodd-Frank, the strict financial reform law enacted by former President Obama in 2010, ordered the Fed to issue annual stress tests to all U.S. bank holding companies with more than $50 billion in assets. A bipartisan bill signed by President Trump last month raised that threshold to $100 billion.

The Fed said it would not release the stress test results of three banks that would have originally been included in the 2018 cycle, but now fall below the $100 billion threshold: CIT Group Inc., Comerica Incorporated, and Zions Bancorporation.

Banks subject to this year’s stress tests were graded on their ability to respond to three levels of hypothetical economic downturns.

The most extreme situation, called the “severely adverse scenario,” judged banks on how they could handle a severe global recession with the U.S. unemployment rate rising to 10 percent, a nearly 6-percent increase from its current level, and a steepening Treasury yield curve.

The Treasury yield curve tracks interest rates on U.S. federal bonds by maturation date. Economists consider higher long-term Treasury yields to reflect a strengthening economy, while higher rates for short-term bonds are seen as a troubling sign.

The Fed said that the 2018 severely adverse scenario is the most challenging situation used by the central bank in stress tests.

Banks above the $100 billion threshold are also subject to the Comprehensive Capital Analysis and Review (CCAR), which determines their ability to fund dividend payments and share buybacks amid economic crises. The Fed is scheduled to release those results next Thursday.