The criticism is notable because State Street, among others, lobbied successfully this spring for lawmakers to reduce the capital requirements that custody banks face on deposits they stash at the Fed.
Fed Vice Chairman Randal K. Quarles said in a statement on Thursday that the test results “demonstrate that the largest banks have strong capital levels, and after making their approved capital distributions, would retain their ability to lend even in a severe recession.”
Banks will likely use the results to amplify their argument that, 10 years after the financial crisis, they do not need to be as tightly regulated. The 35 banks that went through the stress tests have added $800 billion in high-quality capital since 2009, the Fed said. While those banks would lose $578 billion during a severe recession, the Fed concluded that they would be able to keep lending in such an environment.
Last week, the Fed said all 35 banks had passed the first of two hurdles in their yearly evaluations, which tested how they would hold up if the economy sank into a recession, with the unemployment rate spiking and house prices cratering. Thursday’s round of tests included a “qualitative” assessment that evaluated whether banks have adequate internal controls and risk management systems to ensure they can detect potential problems before they escalate.
Both tests form the basis of the regulator’s decision about whether to let the banks distribute some of their cash to shareholders through buybacks and dividends.
For foreign banks, the tests determine how much capital they can send back their parent companies overseas.
These days, there’s plenty of cash to hand out.
In the first three months of 2018, bank profits increased 27.5 percent from last year, the Federal Deposit Insurance Corporation reported in May. The Fed’s interest-rate increases and Mr. Trump’s tax cuts fueled the bumper profits. JP Morgan Chase, Wells Fargo and Bank of America already have reported saving a total of about $8 billion thanks to the tax cuts, according to the research group Just Capital.
The Fed’s announcement on Thursday that most banks can plow ahead with big dividend payouts and share buybacks is likely to provide ammunition to Democrats who already have been attacking the tax cuts as a giveaway to big banks and wealthy shareholders. After last year’s tests, banks announced their largest dividend payouts in nearly a decade.
