Federal Reserve stress test: 32 banks can withstand $708 billion in losses
Federal Reserve Vice Chair for Supervision Michelle Bowman said in a news release: “Today’s test results highlight the resilience of the banking system.”
According to the Federal Reserve's annual stress test released Wednesday, the largest U.S. banks could absorb more than $708 billion in losses in a severe global recession scenario while continuing to lend to households and businesses.
In the hypothetical scenario set by regulators, the Federal Reserve tested 32 banks, all of which remained above the minimum capital requirements. The scenario included unemployment rising to 10%, commercial real estate prices falling 39%, and home prices declining 30%.
The key capital metric used to measure loss absorption during a downturn, common equity tier 1, fell 1.6 percentage points in the stress test but remained well above the required minimum.
Projected losses in the stress scenario included about $200 billion from credit cards, $160 billion from commercial and industrial loans, and $75 billion from commercial real estate.
The annual test also comes at a key moment for bank regulation. Unlike previous years, this year's results will not affect the amount of capital large banks must hold.
That is because in February the Federal Reserve said it would keep stress test buffers unchanged through 2027 while regulators redo the stress test methodology and consider industry feedback. The adjustment could change in the future how much capital institutions need to prepare for a potential downturn.
KBW described this year's test as a “check-the-box exercise” in a research note released on June 21. KBW analyst Christopher McGratty said banks may be more focused on the Basel III Endgame proposal expected later this year than on adjusting solely based on this stress test's results.
KBW estimated that if this year's test results were incorporated into capital requirements, Morgan Stanley, Citigroup, Citizens Financial, and KeyCorp could see relatively large reductions in their capital buffers.
