Later this afternoon, the Federal Reserve will release the results of its 2022 bank stress tests, which were established under Dodd-Frank regulations following the global financial crisis.
All 34 U.S. banks with over $100B in assets will be checked against a series of doomsday scenarios to ensure their balance sheets can withstand a hypothetical downturn. The results – which will particularly focus on stress in commercial real estate and corporate debt markets – come amid growing fears of a looming recession, meaning an economic spiral may not be all that hypothetical.
Snapshot: In the first session of a two-day testimony on Capitol Hill, Fed Chair Jerome Powell emphasized that the central bank plans to keep raising interest rates until it sees clear proof that inflation is slowing, even if that means causing a recession. “It’s not our intended outcome at all, but it’s certainly a possibility,” he told the Senate Banking Committee. “We are not trying to provoke and do not think we will need to provoke a recession, but we do think it’s absolutely essential” to bring down price pressures. Stocks edged lower following the testimony, while U.S. equity index futures wavered between gains and losses overnight.
“The events of the last few months around the world have made it more difficult for us to achieve what we want,” Powell continued. “We’ve never said it was going to be easy or straightforward.” The messaging is a notable departure from his stance on March 2, when Powell stated it is “more likely than not that we can achieve what we call a soft landing.” The Fed has already raised rates three times since then, and most recently upped the federal-funds benchmark by 75 basis points in the largest hike since 1994.
More on stress tests: The annual health checks dictate the required size of each bank’s “capital buffer,” which refers to the extra cushion of capital that’s set aside on top of the regulatory minimum needed to support daily business. The checks also determine how much lenders can return to shareholders in the form of share buybacks and dividends (which could only be announced from June 27). This year’s tests might be harder because the actual economic baseline is healthier, while spikes in unemployment or a drop in GDP would be felt more acutely. However, all of the banks are still expected to pass, but could be told to set aside slightly more capital than last year.