US banks, Deutsche, clear Fed stress tests | Business| Economy and finance news from a German perspective | DW | 22.06.2018
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US banks, Deutsche, clear Fed stress tests

The biggest US banks, including Deutsche Bank's US subsidiary, are equipped to survive a recession, the Fed says. Yet there are warning signs, including for Deutsche, whose credit rating took another hit on Thursday.

The largest US banks are sufficiently capitalized to survive a severe global recession, the US Federal Reserve has announced.

The United States' central banking system, most commonly known as the Fed, announced the results of a first round of so-called "stress testing" , with the tests designed to model the economic effects of a severe recession.

The US regulators said the results showed that all 35 of the country's major banks, such as Bank of America, Wells Fargo and Morgan Stanley, had strong enough balance sheets to survive a crisis comparable to that which struck the global financial system in 2008.

The US subsidiary of Deutsche Bank also survived the first round of testing, in a rare piece of positive news for the embattled German lender.

Read more: US Senate confirms Powell as new Fed chief

While all of the banks passed the first hurdle of testing, some come perilously close to the red line of minimum capital levels in the event of a worst-case scenario recession. Goldman Sachs and Morgan Stanley both record supplementary leverage ratios (SLR — a measure of equity compared to total assets) of 3.1 percent and 3.3 percent respectively, with 3 percent the minimum level they must maintain.

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Deutsche Bank - the Problem Bank

Several analysts have warned that the second round of Fed stress tests, due later this year, may be less forgiving than this round, with more qualitative metrics coming into play.

Downgrade for Deutsche

For Deutsche Bank, news that the bank's US subsidiary has passed the first hurdle barely offsets other bad news afflicting the Frankfurt-based institution.

Read more: Punch-drunk banking

On Thursday night, the ratings agency Fitch lowered its outlook for Deutsche Bank from "stable" to "negative." Their actual credit rating remains at BBB+ but a lower credit rating may follow, with Fitch saying the revised outlook reflects uncertainty over the bank's restructuring plans.

Earlier this month, rating agency S&P downgraded its view of Deutsche Bank's financial stability, down from A- to BBB+.  

Testing the surface

As for the Fed stress tests, the news that the biggest banks in the US ought to be equipped to handle a major recession apparently clears the way for the banks to make record payouts to its shareholders over the coming financial year.

The tests simulate a scenario where  domestic unemployment moves to 10 percent, GDP shrinks and financial conditions worsen significantly. Projected losses for the 35 banks in this scenario amounted to $578 billion (€496 billion) over nine quarters, up from the $383 billion in losses for 34 banks calculated last year.

In the wake of their too-close-for-comfort results, Goldman Sachs and Morgan Stanley issued statements aimed at reassuring investors.

aos/hg (AFP, dpa)

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