FirstFT: Banks undergo stress tests as recession looms

The ability of the largest US banks to withstand a severe economic downturn will be in focus this week as the Federal Reserve publishes the results of the industry’s annual stress tests, amid growing fears of a recession.

The test, which runs through a series of doomsday scenarios for 34 banks including Goldman Sachs and JPMorgan Chase, is a crucial gauge of financial strength and helps determine how much capital lenders will be able to put towards dividends or share buybacks.

US subsidiaries of foreign banks with significant American investment banking operations are also subject to the Fed stress test. Industry observers are paying particular attention to Credit Suisse, which was put on a watchlist of institutions requiring tougher supervision by the UK financial regulator, 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 on 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 one capital, or CET1, they will have to hold relative to their risk-weighted assets in excess of regulatory minimums. This CET1 ratio is a crucial benchmark of financial stability.

Thanks for reading FirstFT Americas. Here is the rest of the day’s news — Gordon

Five more stories in the news

1. Retailers face shake-up as US consumers trade down In earnings calls and investor conferences in recent weeks, several US retailers have flagged that customers have begun migrating to cheaper products and own brands. The trend is feeding market concerns about the sector.

2. Workers at crypto operator Terraform put on no-fly list South Korean prosecutors have banned Terraform Labs employees from leaving the country as an investigation into the company and its co-founders deepens after the $40bn implosion of its cryptocurrency. The sudden collapse of terraUSD, a stablecoin, and its accompanying token luna in mid-May sparked chaos in cryptocurrency markets.

3. Brazil’s Nubank plots consolidation in Latin America’s booming fintech sector Latin America’s biggest digital lender is planning to take advantage of an impending shakeout in the region’s booming financial technology sector by scooping up acquisitions at bargain prices, its chief executive has told the Financial Times.

4. Israel faces fifth election in three years Prime Minister Naftali Bennett and Yair Lapid, foreign minister, yesterday said that they had “exhausted options to stabilise” their coalition government. Israel’s parliament could begin the process of dissolving itself as soon as tomorrow, according to the prime minister’s officials. Lapid will become interim prime minister and elections are likely to be held in October.

5. EY break-up plan could pay partners $8mn each in shares The Big Four firm’s plan to split its audit and advisory operations is set to hand partners shares worth up to $8mn each, according to individuals with knowledge of internal plans. FT accountancy correspondent Michael O’Dwyer breaks down the planned split — and how EY intends to keep 13,000 partners happy.

The day ahead

January 6 committee public hearing The special House committee set up to investigate the events surrounding last year’s storming of the Capitol today focuses on the pressure Donald Trump put local officials under. The fourth public hearing will hear from Georgia secretary of state Brad Raffensperger who Trump personally called in an attempt to overturn the result in the state.

Elections Primary elections will take place in Virginia and Washington, DC. Voters in Alabama and Georgia will cast their ballots in run-off elections.

Market outlook Shares on Wall Street are expected to open higher after yesterday’s Juneteenth public holiday. Futures markets implied the S&P 500 equity benchmark, which has fallen more than a fifth from its January peak, would gain 1.4 per cent at the New York opening bell.

Economic data Economists forecast that existing home sales continued to decline in May. Secondary market sales, which have been falling since the start of the year, are also likely to be down. The drop has come amid surging mortgage rates and higher inflation.

Monetary policy Richmond Fed president Thomas Barkin will speak before the Risk Management Association in Richmond, Virginia.

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

What else we’re reading

Illinois governor’s race shapes up to be a battle of the billionaires When hedge fund billionaire Ken Griffin decided to throw $50mn of his own money behind a candidate to unseat a fellow billionaire from the Illinois governor’s mansion, the vast size 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 A growing number of privately owned companies are being bought and sold by the same firm. Such deals have partly been a consequence of the tidal wave of cash that has flooded private markets during the long era of low interest rates. But critics point to conflicts of interest.

Ex-rebel faces uphill task to meet Colombian voters’ expectations “What’s coming is true change, real change,” Gustavo Petro promised supporters in a speech on Sunday after securing a narrow victory in Colombia’s presidential election. But delivering on the hopes of millions of voters who have long felt ignored by the country’s political elites and denied a 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 moved quickly on the “fragmentation” of the bloc’s sovereign bond market. Investors will deduce the central bank’s point of intolerance from intervention, writes Eric Lonergan, fund manager at M&G.

Elon Musk’s aid to Ukraine attracts scrutiny in China When Elon Musk’s SpaceX dispatched a shipment of Starlink satellite kits to fortify Ukraine’s internet network against Putin’s forces in the early days of the war he was commended by western leaders. China, however, took a different view. Tesla makes a quarter of its revenues in China and now its chief executive is under pressure from the country’s national security and data hawks.

Books

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