U.S. megabanks are better poised now to survive a crisis than they were in 2008, the Federal Reserve announced Thursday, despite the fact that they would suffer massive losses in another panic.
The Fed announced the results of the stress tests it conducts as required by the Dodd-Frank financial reform law, in which it assesses how banks would perform in the case of a crisis. In a scenario in which the U.S., Europe and Japan all fell into a recession, asset prices fell by half and house prices fell to 2001 levels, the 30 largest banks would suffer collective losses of $501 billion, the Fed said.
Nevertheless, even after those losses, U.S. banks would be better positioned than they were during the financial crisis, according to the Fed's modeling. Banks' aggregate capital ratio would fall from 11.5 percent in the most recent measurement to 7.6 percent in the crisis scenario. In the beginning of 2009, those same banks' capital ratio fell to 5.5 percent.
Fed Governor Daniel K. Tarullo, who leads the central bank's committee on financial oversight, said that "each year we are making substantial improvements, which have helped make the process even stronger than when we first conducted the stress tests in the midst of the financial crisis five years ago."
Only one of the 30 banks, Zions Bancorp., based in Salt Lake City, saw its capital drop below regulators' mandated minimum level in the stress test. Other banks, however, such as M&T Bank, Morgan Stanley, JP Morgan Chase, Bank of America and Ally Financial saw their capital fall to near the critical level.