Federal Reserve warns of $541 billion exit from US banking system

The Federal Reserve claims that the US banking system could lose a total of $541 billion as a result of a severe recession.

It concerns a group of 23 banking giants, including JPMorgan Chase, Bank of America and Wells Fargo, that would have to hand in billions of dollars if a severe recession hits. That loss of capital would primarily consist of $424 billion in losses on loans.

Federal Reserve remains optimistic

Despite expectations that the US banking system would lose more than $500 billion in a dark scenario, the Federal Reserve remains optimistic. “All 23 banks tested remained above capital requirements during the hypothetical recession, despite projected losses of $541 billion,” the Federal Reserve said.

During the stress test, the Federal Reserve faked a global recession, in which commercial real estate prices fell 40 percent and home prices fell 38 percent.

Unemployment rose in this scenario by 6.4 percent to a peak of 10 percent and the economic output of the United States fell sharply. Despite those tough conditions, the four largest banks would survive, according to the Federal Reserve.

That is a hopeful result for the US banking sector, but remember that this is all about theory. In practice, it remains to be seen whether the banking sector can indeed withstand a severe recession, in which a lot of unexpected things can happen.

What does this mean for Bitcoin?

In principle, nothing at all yet, although the Federal Reserve seems to be preparing for a possible deep recession with these tests. The US central bank says that they expect the largest banks to survive such a storm, but that says nothing about the smaller banks within the system.

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All in all, it remains difficult to make statements with any degree of certainty about the entire financial system based on the models used by the Federal Reserve. Often it is precisely the surprises, which could not be found in the models, that cause the greatest misery.

We also saw this with the cautious banking crisis of March 2023, after which Bitcoin briefly went into rocket mode. It is good to know that the Federal Reserve is confident in the stability of the US banking sector, but that cannot be a real reassurance based on all the past events.

After all, with a few exceptions, no one saw a global financial crisis coming in 2008.

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