The US Federal Reserve is to carry out stress tests on large US banks against shocks such as a worsening of the eurozone sovereign debt crisis as part of an annual review of the financial system.

Results of the tests will be published next year on institutions such as Bank of America, Citigroup, Goldman Sachs, JP Morgan, Morgan Stanley and Wells Fargo. A total of 31 institutions will be tested, the central bank said in a statement.

Earlier this year, the European Union’s own banking authorities carried out stress tests on a raft of banks across the bloc, although the tests have come under fire for not having allowed for the chance of a sovereign debt default, as in the case, say, of Greece.

The financial health of major banks is an important issue for wealth management, since the strength of any institution and its ability to withstand shocks is increasingly seen as an important matter for clients concerned about the safety of their assets. Such risks were highlighted, for example, by the collapse of Lehman Brothers and massive losses suffered by a host of institutions. 

The Fed set out the test requirement for top-tier US banks with consolidated assets of $50 billion or more. “As a part of the review, known as the Comprehensive Capital Analysis and Review, the Federal Reserve in 2012 will carry out a supervisory stress test based on the same stress scenario provided to the firms to support its analysis of the adequacy of the firms' capital,” the central bank said.

The Federal Reserve will approve dividend increases or other capital distributions only for companies whose capital plans are approved by supervisors and are able to demonstrate sufficient financial strength to operate as successful financial intermediaries under stressed macroeconomic and financial market scenarios, even after making the desired capital distributions.

According to Reuters, the Fed's hypothetical stress scenario includes the chance that unemployment could reach 13 per cent while US gross domestic product would fall by as much as 8 per cent.

The tests apply to 31 firms, comprising 19 banks that have already been tested and 12 additional firms considered to be less complex, the Fed’s statement said.

Institutions must send the Fed their capital plans by January 9 next year.