FirstFT: Banks undergo stress tests as recession looms

The ability of the largest US banks to withstand a severe economic downturn will be the focus this week when the Federal Reserve releases the results of the industry’s annual stress tests amid mounting recession fears.

The test, which runs through a series of doomsday scenarios for 34 banks including Goldman Sachs and JPMorgan Chase, is a crucial measure of financial strength and helps determine how much lenders can invest in dividends or stock buybacks.

US subsidiaries of foreign banks with significant US investment banking activities are also subject to the Fed’s stress test. Industry watchers are paying particular attention to Credit Suisse, which has been placed by Britain’s financial regulator on a watch list of institutions in need of stricter supervision, the Financial Times reported this month.

The results of the US test, which is a requirement of the post-crisis Dodd-Frank financial regulations, are due June 23.

The exercise will determine the so-called stress test capital buffer for the largest US banks – the amount of high-quality Common Equity Tier 1 capital, or CET1, they are required to hold relative to their risk-weighted assets, which are above the regulatory minimum. This CET1 ratio is a key measure of financial stability.

Thank you for reading FirstFT Americas. Here’s the rest of the day’s news – Gordon

Five more stories in the news

1. Retailers face shocks as US consumers trade lower During earnings calls and investor conferences over the past few weeks, several US retailers have indicated that customers have started switching to cheaper products and private labels. The trend fuels market concerns about the sector.

2. Crypto operator Terraform workers put on no-fly list South Korean prosecutors have banned Terraform Labs employees from leaving the country as investigations deepen into the company and its co-founders following the $40 billion implosion of its cryptocurrency. The sudden collapse of terraUSD, a stablecoin, and its related token Luna in mid-May unleashed chaos in the cryptocurrency markets.

3. Brazil’s Nubank is planning a consolidation in Latin America’s booming fintech sector Latin America’s largest digital lender plans to capitalize on an upcoming shakeout in the region’s booming financial technology sector by making acquisitions at bargain prices, its chief executive told the Financial Times.

4. Israel faces its fifth election in three years Prime Minister Naftali Bennett and Foreign Minister Yair Lapid said yesterday they had “exhausted the possibilities to stabilize” their coalition government. According to prime minister’s officials, the Israeli parliament could begin the process of self-dissolution as early as tomorrow. Lapid will become interim prime minister and elections are expected to take place in October.

5. The EY separation plan could pay the partners $8 million each in stock The Big Four firm’s plan to split its audit and advisory activities includes giving up to $8 million worth of partner stock each, according to people with knowledge of internal plans. FT accounting correspondent Michael O’Dwyer explains the proposed split – and how EY intends to keep 13,000 partners happy.

The day ahead

Committee public hearing on 6 January The House Special Committee, set up to investigate the events surrounding last year’s storming of the Capitol, is focusing today on the pressure Donald Trump put on local officials. The fourth public hearing will hear Georgia Secretary of State Brad Raffensperger, who Trump personally called to try to overturn the state’s finding.

Choose Primary elections take place in Virginia and Washington, DC. Voters in Alabama and Georgia will cast their ballots in runoff elections.

market prospects Stocks on Wall Street are expected to open higher after yesterday’s June 16 bank holiday. Futures markets indicated that the S&P 500 benchmark for equities, which has fallen more than a fifth since its peak in January, would gain 1.4 percent by the opening bell in New York.

economic data Economists are forecasting existing home sales to fall further in May. Secondary market sales, which have been declining since the beginning of the year, are also likely to decline. The decline is due to rising mortgage rates and higher inflation.

monetary policy Richmond Fed President Thomas Barkin will address the Risk Management Association in Richmond, Virginia.

Summer solstice It’s the longest day of the year and the first day of summer in the northern hemisphere.

What else do we read?

The race for governor of Illinois turns into a battle of the billionaires When hedge fund billionaire Ken Griffin decided to throw $50 million of his own money behind a candidate to oust another billionaire from the Illinois governor’s mansion, the sheer magnitude of his spending should have made it a foolproof plan. The only problem: a rival Republican billionaire had the same idea.

The private equity groups that buy companies they own More and more private companies are being bought and sold by the same firm. Such deals were in part a consequence of the tidal wave of cash that has swept through private markets during the long era of low interest rates. However, critics point to conflicts of interest.

The ex-rebel faces a difficult task to meet the expectations of Colombian voters “What’s coming is real change, real change,” Gustavo Petro promised his supporters in a speech on Sunday after winning a narrow victory in Colombia’s presidential election. But fulfilling the aspirations of millions of voters who have long felt ignored by the country’s political elites and have no chance to improve their lives will be a major challenge, writes Latin America editor Michael Stott.

Can the ECB prevent a second euro crisis? The European Central Bank has been quick to respond to the “fragmentation” of the bloc’s government bond market. Investors will take the point of central bank intolerance from intervention, writes Eric Lonergan, fund manager at M&G.

Elon Musk’s help to Ukraine draws attention in China When Elon Musk’s SpaceX dispatched a shipment of Starlink satellite kits to bolster Ukraine’s internet network against Putin’s forces in the early days of the war, he was praised by Western leaders. However, China took a different view. Tesla makes a quarter of its sales in China, and now its CEO is under pressure from the country’s national security and data hawks.

Books

FT science editor Clive Cookson lists his five favorite books of the year, including a self-help guide for people wanting to sleep better, while senior business writer Andrew Hill reads his top 10 mid-year books.