The Federal Reserve’s annual stress test has concluded that the 32 largest U.S. banks possess sufficient capital to withstand a severe global recession.
According to the test results, all banks remained above their minimum capital requirements despite projected losses exceeding $708 billion. However, the results will not alter current capital requirements for the banks.
Key Findings
The Federal Reserve's assessment projected that the 32 banks could sustain over $708 billion in total loan losses during a hypothetical severe recession while continuing to lend to households and businesses.
The industry's aggregate Common Equity Tier 1 (CET1) capital ratio declined by 1.6 percentage points but stayed above the required minimum threshold.
All 32 institutions tested maintained capital levels above their minimum CET1 requirements throughout the hypothetical scenario.
Hypothetical Scenario
The stress test was based on a theoretical economic downturn that included the following parameters:
- A severe global recession
- A peak unemployment rate of 10%
- A 39% decline in commercial real estate prices
- A 30% decline in house prices
- A corresponding decline in economic output
Breakdown of Projected Losses
The projected loan losses were distributed across major asset classes:
- Credit card losses: approximately $200 billion
- Commercial and industrial loan losses: approximately $160 billion
- Commercial real estate losses: approximately $75 billion
Factors Influencing Results
The Federal Reserve identified three primary factors affecting the aggregate capital decline:
- Higher loan losses, attributed to increased loan balances and the severity of the scenario
- Lower projected unrealized gains in bank securities, due to smaller hypothetical interest rate declines
- Higher interest income, resulting from recent bank performance and the smaller hypothetical rate declines
Impact on Capital Requirements
The test results will not influence the amount of capital large banks are required to hold. The Federal Reserve announced in February that stress test buffers would remain unchanged until 2027, while the methodology is being revised.
Officials from Keefe, Bruyette & Woods (KBW) noted in a research publication dated June 21 that banks are likely to focus on the pending Basel III Endgame proposal, which is expected later this year. KBW estimated that if this year's results had affected capital requirements, Morgan Stanley, Citigroup, Citizens Financial, and KeyCorp would have experienced some of the largest reductions in capital buffers.
Official Statement
"Today's results underscore the strength of the banking system."
— Federal Reserve Vice Chair for Supervision Michelle Bowman