All 31 US banks clear first phase of Fed stress testing

WASHINGTON (Reuters) - All 31 U.S. banks passed a test of how they would do in a next economic crisis, the Federal Reserve said on Thursday, but those with large trading books came out weak because of new elements in the check-up.

The Fed had assumed a surge in corporate defaults in the toughest hypothetical scenario to test banks' resilience, which it said hit banks with large capital market activities.

All 31 banks tested stayed above the 5 per cent minimum for top-tier capital. But Wall Street banks such as Goldman Sachs, Morgan Stanley and JP Morgan Chase & Co were among the five banks with the lowest readings.

The results come ahead of the publication of the second stage of the so-called stress tests next week, in which the Fed says whether banks can go ahead with planned increases in shareholder pay-outs such as dividends.

In that second stage of the exercise, the Fed uses qualitative criteria to assess how well banks manage their risk. The U.S. units of Deutsche Bank and Santander are expected to fail at that stage.

Zions Bancorp had the lowest reading, coming in at 5.1 per cent in the simulation, which included a 25 percent drop in home prices and a stock market drop of nearly 60 per cent. Last year, the bank fell just short of the 5 per cent mark.

Next week's review takes a look under the hood of the banks, which Wall Street critics say are "too large to manage", by scrutinizing whether managers are in truly in control of their firms. And the test is becoming tougher each year.

Global regulators have forced banks to borrow less to fund their business after the crisis, and the stress tests are increasingly becoming an important instrument for the Fed to test the industry's resilience.