America’s 34 largest banks have all passed the first stage of the Federal Reserve’s annual stress tests, meaning they would have enough capital to meet regulatory requirements during a severe economic crisis.

The two-part test revealed that the biggest US lenders would be hit by $383bn in loan losses in a hypothetical scenario in which the US employment rate rose to 10 per cent.

However, lenders’ aggregate levels of high-quality capital would still cover 9.2 per cent of their risk-weighted assets, which is significantly higher than the 4.5 per cent required by regulators and an improvement on last year’s 8.4 per cent.

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“This year’s results show that, even during a severe recession, our large banks would remain well capitalised,” governor Jerome H. Powell said.

“This would allow them to lend throughout the economic cycle, and support households and businesses when times are tough.”

The 34 bank holding companies tested, which are generally those with $50bn or more in total consolidated assets, represent more than 75 per cent of the assets of all domestic bank holding companies.

The Fed introduced stress tests after the 2008 financial crisis rocked markets around the globe in order to examine whether the country’s biggest banks could handle a severe recession.

Next Wednesday, investors will watch as the Fed announces the results of the Comprehensive Capital Analysis and Review, which determines how much money Wall Street banks can devote to dividends and stock buybacks during the next year.

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Today’s results were the first under President Donald Trump, who aims to relax capital regulations and encourage banks to lend more. Analysts had expected US banks to make a strong showing in this year’s test.

Citigroup performed the best with a tier 1 capital ratio of 9.7 per cent. Ally Financial and KeyCorp were both below seven per cent.

Meanwhile, banking giants JP Morgan, Bank of America Wells Fargo, Goldman Sachs and Morgan Stanley showed common equity tier 1 capital ratios between 8.4 and 9.4 per cent.

Full story: US banks pass the first round of the Fed’s annual stress tests: City A.M.