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US Banks More Fragile Than Last Year, Fed's Stress Test Reveals

America's biggest banks are poised to withstand a severe recession while continuing to lend to households and businesses, the Federal Reserve reported in its annual stress test. However, the banks could face higher losses if an economic downturn strikes now compared to last year.

The stress tests, implemented after the banking crisis that led to the Great Recession, are crucial for identifying weaknesses in the financial system. Their importance has increased after the collapse of three US banks shook the banking system last year.

The 31 banks tested would collectively lose $685 billion, $144 billion more than last year's results, despite fewer banks being tested last year. Fed Vice Chair for Supervision Michael Barr explained that banks have taken on more risk and higher expenses. The current higher interest rate environment makes lending riskier and costlier, affecting bank profitability.

Credit card debt, which recently hit a record high, is a significant factor in the increased projected losses. More people are making late payments, contributing to higher credit card losses. Meanwhile, banks' income from fees has decreased, reducing their ability to absorb these losses.

“The goal of our test is to help ensure that banks have enough capital to absorb losses in a highly stressful scenario. This test shows that they do,” Barr said.

Individual bank performances varied under the severe recession scenario. JPMorgan Chase disclosed that its losses would likely be “modestly higher” than the Fed's estimate but didn't specify by how much. Discover Financial Services had the highest loan loss rate at 18.7%, followed by Capital One at 16.5%. This will likely prompt regulators to scrutinize their financials more closely, especially since Capital One plans to acquire Discover.

In contrast, Charles Schwab had the smallest loan loss rate at 1.3%, with its stock moving slightly higher after the results. Read More. 

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America's 60-Year-Olds Face Looming Financial Crisis

Shauna Sharpes, a payroll manager in Washington state, doesn't travel and grows her own food. At 60, she has meager savings and expects to work for at least another decade. Like many younger baby boomers, Sharpes faces financial uncertainty despite being part of a generation that grew up in prosperous postwar America.

She is among the 70 million baby boomers, many of whom are still financially recovering from the 2007-09 recession and the shift away from guaranteed pensions. In June, the Federal Reserve reported that people over 55 control nearly 70% of U.S. household wealth. However, many of them lack substantial retirement savings or depend solely on Social Security.

Sharpes lost half of her $20,000 401(k) during the financial crisis, used the rest for a home mortgage, and later lost her job. She bought a rundown home and is working to pay off $260,000 in home-related debt, aiming for a $100,000 retirement nest egg.

A recent study shows that over half of the 30 million young boomers turning 65 by 2030 have no more than $250,000 in financial assets. This reliance on Social Security is concerning since it was never meant to be the sole income source in retirement.

The challenges are compounded by the fact that younger boomers are more diverse, with higher percentages of Hispanic and Black individuals who often lack access to retirement plans. Financial hardships are exacerbated by the loss of pensions, forcing individuals to make risky investment decisions with their 401(k) plans.

Sharpes and others like her might have to work into their old age or rely on family support. Many fear that without adequate resources, they may become dependent on Medicaid for long-term care. The financial instability of younger boomers underscores the need for more secure retirement planning and savings solutions.

In similar situations, individuals like Barbara Tarallo and Keith Seawell face significant financial struggles due to job loss, medical issues, and inadequate retirement savings. Their stories highlight the urgent need for more robust financial support systems for aging Americans. Read Now.