European banks pass US Fed stress test and show strong capital levels

WASHINGTON/LONDON, June 23 (Reuters) – U.S. units of major European lenders including Deutsche Bank, Barclays and Credit Suisse passed the Federal Reserve’s annual “stress tests” on Thursday, showing they hold enough capital to cope with an economic shock.

For the seven Fed-supervised European banking subsidiaries with more than $100 billion in assets, the average capital ratio — a measure of the cushion a bank has to deal with potential losses — remained well above the regulatory minimum. by 4.5%.

It was also higher than the average ratio for the wider group of 34 banks tested, according to an analysis of the results by Reuters. Read more

The average capital ratio of the seven European lenders was 15.2%, compared to 9.7% for the 34 banks.

Deutsche Bank’s US operations had the highest ratio of any bank at 22.8%, while Credit Suisse was the third highest in the group with a ratio of 20.1%. HSBC was the laggard of the foreign peloton with a ratio of 7.7%.

As part of its annual stress test set up in the wake of the 2007-2009 financial crisis, the Fed assesses how banks’ balance sheets would fare in the face of a hypothetical severe economic downturn. The results dictate how much capital banks need to be healthy and how much they can return to shareholders.

This year’s very adverse scenario has seen the economy contract by 3.5%, partly due to a fall in the value of commercial real estate assets and the unemployment rate which has climbed to 10%.

The other four European subsidiaries tested were UBS America Holdings, Santander Holdings USA and BNP Paribas USA.

While the scenarios were designed before Russia’s invasion of Ukraine and a sharp rise in inflation, the tests should reassure policymakers that major European lenders are resilient enough to withstand a possible recession this year or in early 2023.

The Bank of England said this month it was pleased that lenders were no longer “too big to fail”, although it called for more clarity on the amount of liquidity including three big banks, including HSBC (HSBA.L), would need if they were to be liquidated. down in a future crisis. Read more

The European Banking Authority is set to conduct its next EU-wide stress test in 2023, but investors are on high alert for evidence of declining asset quality in European banks, as borrowing rates are beginning to rise from historic lows.

In 2020, the Fed changed how the test works, removing its “pass-fail” model and introducing a more nuanced capital regime.

See an EXPLAINER on stress tests here: find out more

Reporting by Michelle Price and Sinead Cruise, editing by Deepa Babington

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