Bank regulators will test the ability of the nation’s largest banks to withstand a new deep recession and wider financial crisis in Europe, the Federal Reserve said Tuesday.
The Fed detailed its plans for the second annual stress test of large financial institutions, a step meant to ensure that giant banks can survive and remain well-capitalized even in grim scenarios for the economy. The stress-test approach was first used during the depths of the financial crisis in 2009, and has become a part of the Fed’s regular tool kit for overseeing big banks.
Fed examiners will estimate the losses that would be incurred by the 19 largest U.S. banks — including Citigroup, J.P. Morgan Chase and Bank of America — if a new economic downturn drove the U.S. unemployment rate to 13 percent and if Europe experienced a severe recession. In other words, regulators want to know whether U.S. banks are well-funded enough to remain solid even if the economy goes off the rails.
The stress tests will help shape the banks’ planning for their capital needs, and the results will be considered by regulators when deciding whether to approve bank requests to pay dividends or buy back shares.