NEW YORK: US banks are facing the toughest stress test in years, even after the Trump administration promised to free the industry from some of its most burdensome regulations.

Banks will have to prove they can survive a steeper stock-market crash, a worse housing crisis and a bigger economic contraction as the Federal Reserve conducts its annual review of their finances — a key step towards higher buybacks or dividends, regulators said on Thursday.

Under the 2018 test, banks will have to show they have enough capital to withstand a US economic contraction of as much as 8.9 per cent. The worst point in tests for the past three years didn’t exceed 7.5pc. Likewise for stocks, this year’s test envisions a 65pc market crash, versus a meltdown of just 50pc in recent years.

The tougher stress test heads in the opposite direction from President Donald Tru­mp’s push to ease rules governing the industry, though US regulators do plan to soften some restrictions governing leverage, according to people familiar with the matter.

“A more benign regulatory backdrop is a relevant part of the investment story for financials,” UBS Group AG analysts led by Saul Martinez said in a report. “However, the more stringent parameters around a severely adverse scenario might suggest that the Fed is increasing the bar for expanding capital returns from existing elevated levels.”

—Bloomberg/Washington Post Service

Published in Dawn, February 4th, 2018