Tags: fed | banks | stress tests | recession

Fed Tests Indicate US Banks Would Weather a Brexit Recession

Fed Tests Indicate US Banks Would Weather a Brexit Recession
(AP)

Saturday, 25 June 2016 11:18 PM

Global stocks are plunging. The pound is crashing. Economists and policymakers are predicting a recession in the U.K. and beyond after Britain’s historic vote to leave the European Union.

If the fallout from Brexit gets worse, will the biggest U.S. banks be able to weather the shock?

The Federal Reserve has provided reason for optimism that they will. The scenarios that lenders were subjected to in the central bank’s annual stress tests included a severe U.K. recession. While the Fed didn’t specifically analyze how banks would fare if Britain left the EU, all 33 banks tested had enough capital to withstand a deep economic meltdown, according to results released Thursday.

“Assuming Brexit turns out to be a real serious issue for the global economy, it still won’t be anywhere close to the worst-case scenario that the Fed has put the biggest U.S. banks through," said Gerard Cassidy, a bank analyst at RBC Capital Markets. “No matter what, our banking system is prepared."

Since starting the annual tests after the 2008 crisis, the Fed has used the process to force firms to build up capital. The exams subject banks to Fed-invented hardships and this year, the hypothetical scenarios were considered especially tough.

Regulators tested whether banks would be able to withstand a severe downturn in the Euro area, the U.K. and Japan, and a mild recession in Asia. As part of the worst scenario, equity prices were seen falling 50 percent as volatility surged to levels seen in 2008. Business conditions were also intense, calling for mounting credit losses, investors retreating from markets and strained liquidity.

Every bank tested cleared the Fed’s exam without sinking below any minimum capital thresholds. It marks the second straight year that all firms passed.

Since the U.K. vote Thursday, regulators have sought to mute panic in global markets. The Fed has said it’s ready to act with other central banks to pump liquidity into markets, if necessary.

Normal Trading

Representatives from the Federal Reserve Bank of New York briefed congressional staffers Friday, telling them that market swings are in line with their expectations, according to people familiar with the matter who weren’t authorized to speak publicly.

New York Fed spokeswoman Suzanne Elio declined to comment.

The Fed, U.S. Treasury, Securities and Exchange Commission and Commodity Futures Trading Commission have also said they are monitoring the situation and communicating with banks and other regulators. SEC Chair Mary Jo White and CFTC Chairman Timothy Massad both said the equity and derivative markets their agencies oversee were functioning normally.

So Britain’s departure from the EU may be the biggest blow yet to globalization, with economic implications that will take at least months to quantify. But if the Fed is right, the biggest U.S. banks should be able to handle it.

And there might even be silver linings, with bankers possibly getting the sustained increases in volatility and trading volumes that they have long craved. JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon was quick to note in a Friday memo to staff that currency trading surged to three times the normal daily volume at his bank after the Brexit vote.


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Global stocks are plunging. The pound is crashing. Economists and policymakers are predicting a recession in the U.K. and beyond after Britain's historic vote to leave the European Union.If the fallout from Brexit gets worse, will the biggest U.S. banks be able to weather...
fed, banks, stress tests, recession
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2016-18-25
Saturday, 25 June 2016 11:18 PM
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