$541,000,000,000 Will Exit US Banking System in ‘Severely Adverse’ Scenario, Warns Federal Reserve

The Federal Reserve says more than half a trillion dollars will exit the American banking system in its “severely adverse” scenario.

The Fed just released its annual bank stress test, which found large US banks would survive a severe recession.

However, the results of the stress test – which is designed to demonstrate how banks would perform under future adverse conditions – show a group of 23 banking giants including JPMorgan Chase, Bank of America and Wells Fargo would lose $541 billion due to the “sensitivities of capital, losses, revenues, and expenses across all banks to the stressed economic and financial market conditions.”

Those losses are comprised of:

• $424 billion in loan losses, which accounts for 78% of total losses
• $18 billion in additional losses from items such as loans booked under the fair-value option, accounting for 3% of total losses
• $94 billion in trading and counterparty losses at the 11 banks with substantial trading, processing, or custodial operations, accounting for 17% of total losses
• $5 billion in securities losses, accounting for 1% of total losses

Despite the large potential losses, the Fed’s analysis of its stress test strikes an optimistic tone.

“All 23 banks tested remained above their minimum capital requirements during the hypothetical recession, despite total projected losses of $541 billion…

This year’s stress test includes a severe global recession with a 40% decline in commercial real estate prices, a substantial increase in office vacancies, and a 38% decline in house prices. The unemployment rate rises by 6.4% to a peak of 10% and economic output declines commensurately.”

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