Big US banks pass ‘rigorous’ stress test - but can you trust it?

America’s largest banks have all passed an annual stress test that hypothetically placed them in a severe recession, but a banking analyst says the failed Silicon Valley Bank (SVB) would have passed too - so are the results worth the paper they’re written on?

The US Federal Reserve’s test scenario considered a near 40 per cent drop in both residential and commercial property prices, the US economy shrinking by 9 per cent and unemployment peaking at 10 per cent.

All 23 banks assessed, including Wells Fargo, Bank of America, JP Morgan Chase, Morgan Stanley, Goldman Sachs, Credit Suisse and UBS, survived the situation and remained above their required capital levels.

“The exam is extraordinarily rigorous and they are very, very good results,” RBC Capital Markets head of U.S bank equity strategy Gerard Cassidy told Markets with Madison.

He said the banks that failed earlier this year, including SVB and Signature Bank, would have passed this tough test “with flying colours,” because it did not assess the issues that put them out of business.

“This test was driven by the results of what happened with the financial crisis, and it measures for credit quality. The three banks that failed had nothing to do with credit quality.”

Cassidy expected changes to the annual test next year, or an additional test, that would test for Silicon Valley Bank’s problems.

Watch him discuss how the U.S banking system is coping on today’s episode of Markets with Madison above.

Plus, Australia now has 10 million adults - half its population - investing outside of their superannuation scheme and family home.

Australian Securities Exchange (ASX) senior manager of investment products Rory Cunningham explained the results, and lessons for New Zealand, on Markets with Madison.

Get investment insights from the experts on Markets with Madison every Monday and Friday on the NZ Herald.

Disclaimer: The information provided in this programme is of a general nature, and is not intended to be personalised financial advice. We encourage you to seek appropriate advice from a qualified professional to suit your individual circumstances.

RBC Capital Markets may be providing services to US banks mentioned.

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Madison Reidy is the host of New Zealand’s only financial markets show Markets with Madison. She joined the Herald in 2022 after working in investment, and has covered business and economics for television and radio broadcasters.