JPMorgan Chase announced late Wednesday that the Federal Reserve overestimated a critical income measure in the bank’s recent stress test, indicating that its actual losses under the exam should be higher than reported. In an unusual move, the bank issued a press release minutes before midnight ET to address the Fed’s findings.
JPMorgan pointed out that the Fed’s projections for “other comprehensive income” (OCI)—which includes revenues, expenses, and losses excluded from net income—appear excessively large. The Fed’s table of projected revenue, income, and losses through 2026 assigned JPMorgan $13 billion in OCI, more than any of the 31 banks in this year’s test. Additionally, the Fed estimated the bank would face approximately $107 billion in loan, investment, and trading losses under the stress scenario.
JPMorgan stated that if its analysis is correct, the resulting stress losses would be modestly higher than those disclosed by the Federal Reserve. This discrepancy may delay the bank’s ability to finalize its share repurchase plan, according to a source familiar with the situation who spoke on condition of anonymity due to the regulatory process. Banks were expected to begin disclosing these plans on Friday after the market closes.
This development adds a wrinkle to the Federal Reserve’s announcement on Wednesday that all 31 banks in the annual stress test exercise cleared the hurdle of being able to withstand a severe hypothetical recession while maintaining adequate capital levels and the ability to lend to consumers and corporations.
This situation is not unprecedented. Last year, Bank of America and Citigroup made similar disclosures, indicating that their estimates of future income differed from the Fed’s results.
The Federal Reserve’s stress tests are designed to ensure that major financial institutions can endure economic downturns without requiring government bailouts. These tests evaluate a bank’s capital adequacy by simulating various adverse economic scenarios and projecting potential losses. The ability to accurately project OCI is crucial for these assessments, as it reflects parts of a bank’s financial health that are not captured in net income.
JPMorgan’s contention underscores the complexities involved in stress testing and the challenges regulators face in modeling accurate financial projections. As banks continue to scrutinize and sometimes challenge the Fed’s results, these stress tests remain a critical tool for maintaining financial stability and confidence in the banking system.
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