In Worst-Case Scenario, Fed Sees $501 Billion in Losses at Nation’s Biggest Banks

Rain falls with the New York Stock Exchange in the background as seen next to the statue of George Washington at Federal Hall in Manhattan, on February 19, 2014.
National Journal
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Catherine Hollander
March 20, 2014, 1:04 p.m.

If the eco­nom­ic worst hap­pens — the worst be­ing defined as a deep re­ces­sion in the United States, steep de­clines in home prices, and re­ces­sions in the euro area as well as Ja­pan — 30 ma­jor banks in the U.S. would lose a total of $501 bil­lion dol­lars over nine quar­ters, ac­cord­ing to the latest round of stress test­ing from the Fed­er­al Re­serve.

That’s com­pared with $355 bil­lion in the slightly-less-scary “ad­verse” scen­ario laid out by the Fed. The cent­ral bank noted, as usu­al, that the “severely ad­verse” and slightly-less-scary “ad­verse” scen­ari­os it tests are “not fore­casts, but rather hy­po­thet­ic­al scen­ari­os de­signed to as­sess the strength of bank­ing or­gan­iz­a­tions and their re­si­li­ence to an ad­verse eco­nom­ic en­vir­on­ment.” The Fed re­leased its ac­tu­al eco­nom­ic fore­casts on Wed­nes­day, and sees mod­er­ate growth on the ho­ri­zon.

This is the fourth year the Fed has done stress tests on the coun­try’s biggest fin­an­cial in­sti­tu­tions. It looked at 30 in­sti­tu­tions this year, up from 18 in pre­vi­ous years. Just one, the Salt Lake City-based Zions Ban­corp, wouldn’t meet the Fed’s min­im­um stand­ards for cap­it­al in a worst-case scen­ario.

“The largest bank­ing in­sti­tu­tions in the United States are col­lect­ively bet­ter po­si­tioned to con­tin­ue to lend to house­holds and busi­nesses and to meet their fin­an­cial com­mit­ments in an ex­tremely severe eco­nom­ic down­turn than they were five years ago,” the Fed said in a state­ment.


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