Fed's stress test shows US banks can survive recession

By Ovunc Kutlu

ISTANBUL (AA) - US Federal Reserve's stress test showed that American banks, in general, can survive a potential recession in the world's biggest economy.

"The 2023 stress test shows that the 23 large banks subject to the test this year have sufficient capital to absorb more than $540 billion in losses and continue lending to households and businesses under stressful conditions," the Fed said Wednesday in its report.

"At the beginning of the 2023 stress test, most banks started with large unrealized losses because the market value of their securities fell as interest rates rose in 2022. However, under the hypothetical recession in the stress test, rates decline, the market values of most securities increase, and these unrealized losses decline," it added.

The stress test assesses whether banks are sufficiently capitalized to absorb losses during stressful conditions while meeting obligations to creditors and continuing to be able to lend to households and businesses, according to the Fed.

The recent banking crisis in the US saw the sudden collapse of three banks in the world's biggest economy – Silicon Valley Bank and Signature Bank in March, followed by First Republic Bank in May.

This was partially due to the Fed's aggressive monetary tightening that saw a total of 500 basis points of interest rate increases in 10 meetings from March 2022 to this May.

Although the central bank's rate hikes brought up the possibility of a recession in the American economy, the US' economic growth in the first quarter of this year was revised up to 2%, up from 1.3%, according to the Commerce Department's latest figures.