The Fed tested the 34 largest banks operating in the United States. It looked at how their balance sheets would withstand sharp drops in asset prices and a total of $612 billion in losses. The tests took on new significance as some economic indicators, like slowing home sales and rising interest rates, appeared to increase the likelihood of a recession.

The tests are part of an annual checkup that regulators began performing on the financial industry after the 2008 financial crisis. Each year, the Fed uses a snapshot of the economy taken at the end of the previous year to design a hypothetical disaster scenario. The better the economy in actuality, the worse the stress-test scenario.

The scenario for the 2022 stress tests was worse than the one that was applied to banks last year because the economy had improved in the interim. All 22 of the banks tested last year also passed. Not every one of the big banks is tested each year. Many banks had gotten rid of cash, releasing some of the reserves they had set aside during the Covid-19 pandemic to prepare for sudden losses.

Francisco Covas, the head of research at the Bank Policy Institute, said the scenario that the Fed had devised for this year’s tests was worse than any recession since World War II. He warned that if regulators continued to raise capital requirements, the banks’ abilities to lend could be restricted.
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