On Thursday, the U.S. subsidiaries of big European banks such as Deutsche Bank, Barclays, and Credit Suisse passed the Federal Reserve’s annual “stress tests,” demonstrating that they have sufficient capital to withstand an economic shock.
On Thursday, the U.S. subsidiaries of big European banks such as Deutsche Bank, Barclays, and Credit Suisse passed the Federal Reserve’s annual “stress tests,” demonstrating that they have sufficient capital to withstand an economic shock.
The average capital ratio — a gauge of a bank’s ability to sustain future losses — remained substantially over the legal requirement of 4.5 percent for the seven European bank subsidiaries supervised by the Fed with more than $100 billion in assets.
According to an examination of the statistics by Reuters, it was also greater than the average ratio for the group of 34 institutions assessed.
The average capital ratio for the seven European financial institutions was 15.2%, compared to 9.7% for the other 34 banks.
Deutsche Bank’s U.S. business had the highest percentage of all banks at 22.8 percent, while Credit Suisse ranked third with a ratio of 20.1%. HSBC lagged behind the rest of the international banks with a ratio of 7.7 percent.
Following the 2007-2009 financial crisis, the Fed instituted an annual stress test to see how bank balance sheets would fare under a hypothetical severe economic downturn. The outcomes determine how much capital banks require to be strong and how much they may return to shareholders.
The economy contracted by 3.5 percent this year, driven in part by a decline in the value of commercial real estate assets, and the unemployment rate increased to 10 percent.
UBS America Holdings, Santander Holdings USA, and BNP Paribas USA were the other three European subsidiaries that were evaluated.
While the scenarios were developed before Russia’s invasion of Ukraine and a substantial increase in prices, the tests should comfort policymakers that Europe’s leading banks are strong enough to endure a potential recession this year or in early 2023.
The Bank of England stated this month that it was confident that lenders were no longer “too large to fail,” although it called for additional transparency over the liquidity needs of three major banks, including HSBC, in the event of a future crisis.
The European Banking Authority is expected to conduct its next EU-wide stress test in 2023, but investors are on high alert for signs of a deterioration in the asset quality of European banks as borrowing rates begin to increase from record lows.
In 2020, the Fed altered the test’s structure, abandoning the pass/fail methodology and instituting a more nuanced capital regime.
