Fed says banks in good shape, can withstand severe economic contraction

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Fed says banks in good shape, can withstand severe economic contraction

The Federal Reserve determined Thursday that the nation's major banks are in good shape and can withstand a severe economic contraction.

The federal reserve gave a passing grade to the 33 largest banks after the latest annual stress tests. This year's scenario was being able to handle an unemployment rate that would double to 10% and a severe contraction in commercial real estate and stock market values that could cause losses of more than $600 billion.

The banks would have a capital ratio of 9.7%, well above the 4.5% required by law, even in with those variables, the Fed said. Capital ratios are used to measure how strong a cushion a bank holds against unexpected losses.

They must pass these tests before they can start paying dividends and buying back shares.

Banks will announce their plans for dividends and buybacks on Monday.

The Fed testing is used to see how much damage the banking industry would be if unemployment were to skyrocket and economic activity severely contracted.

The stress tests have become an annual report card for the nation's financial system after the Great Recession and 2008 financial crisis.