Biggest US banks clear first hurdle in Fed's annual stress tests

The Fed was yesterday also scheduled to publish the results of annual stress tests for major banks, which are called for under Dodd-Frank and meant to make sure lenders are on solid capital footing in the event of a crisis.

Overall, officials found that in the most severe scenario, companies would have suffered about US$383 billion in losses on loans. Passing the stress test does not necessarily mean a lender will pass the CCAR as the PhDs at the Fed can approve or flunk a bank based on qualitative as well as quantitative grounds.

Powell said this week the Fed would be open to reasonable changes to the law, including the threshold for including banks in the stress tests. Analysts had expected U.S. banks to make a strong showing in this year's test.

"This year's results show that, even during a severe recession, our large banks would remain well capitalized", Federal Reserve Gov. Jerome Powell said in a statement.

President Trump has vowed to scrap many regulations on banks, particularly those that he says have suppressed lending. Shareholders of the fourth-largest USA bank have been clamouring for management to buy back more of its stock, which is trading below what its assets are worth.

All the banks can now amend their plans on dividend payments and stock buybacks to win Fed approval before it announces its decisions on those issues next Wednesday.

The Dodd-Frank Act stress tests are one component of the Federal Reserve's analysis during the Comprehensive Capital Analysis and Review (CCAR), which is an annual exercise to evaluate the capital planning processes and capital adequacy of large bank holding companies.

Goldman Sachs Group's projected loan-loss rate of 8.1 per cent was surpassed only by commercial lenders or card issuers such as American Express, Capital One Financial Corp, and Discover Financial Services.

Citigroup Inc (C.N) fared the best among big Wall Street banks, with a ratio of 9.7 percent.

Regulators can reject a bank's capital plan for either reason.

Each year, regulators tweak the exam to keep banks on their toes.

Seeking to provide some regulatory relief to community banks and other small financial institutions, bank regulators on Thursday asked Congress to consider several changes to the 2010 Dodd-Frank financial reform laws. Before Thursday's results, analysts predicted banks would be able to return more than US$120 billion to shareholders over the next four quarters, or about 85 percent of their profit.

"If the Fed bets wrong and treats one particular trading strategy as low risk and it's high risk, all the banks will have taken that low-risk bet and it will have turned out very badly", she said.