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Investing.com -- Bank stocks moved higher on Friday after the Federal Reserve’s annual stress test showed major financial institutions are well-positioned to weather a severe economic downturn while maintaining adequate capital levels.
Goldman Sachs Group Inc (NYSE:GS) led the gains, rising 3.1%, while Wells Fargo & Company (NYSE:WFC) climbed 1.9%. Bank of America Corp (NYSE:BAC) added 1.4%, with JPMorgan Chase & Co (NYSE:JPM) and Capital One Financial Corporation (NYSE:COF) each up 0.5%.
The Fed’s stress test revealed that all 22 banks tested remained above their minimum common equity tier 1 (CET1) capital requirements during the hypothetical severe recession scenario. The aggregate decline in the CET1 capital ratio was just 1.8 percentage points, smaller than declines observed in recent years.
"Large banks remain well capitalized and resilient to a range of severe outcomes," said Fed Vice Chair for Supervision Michelle W. Bowman in the announcement.
This year’s stress scenario, which was less severe than last year’s due to the test’s countercyclical design, included a severe global recession with a 30% decline in commercial real estate prices and a 33% decline in house prices. It also modeled an unemployment rate rising by nearly 5.9 percentage points to 10%.
Despite these challenging conditions, the banks collectively absorbed projected hypothetical losses of more than $550 billion, including nearly $158 billion in credit card losses, $124 billion in losses from commercial and industrial loans, and $52 billion in commercial real estate losses.
The Fed noted it plans to address unintended volatility in its stress test models when it discloses and seeks public comment on models and scenario design framework later this year.
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