Fed: Large Banks Would Remain Well-Capitalized Under Severe Stress

The largest U.S. banks collectively showed that they can withstand a severe economic downturn and continued to improve their capital positions, according to the results of Dodd-Frank Act-mandated stress tests the Federal Reserve released today.

“This year’s results show that, even during a severe recession, our large banks would remain well capitalized,” said Fed Governor Jerome Powell. “This would allow them to lend throughout the economic cycle, and support households and businesses when times are tough.”

Aggregate Tier 1 capital ratios at the 34 firms subjected to the Fed’s stress-test program would fall from an actual 12.5 percent in the fourth quarter of 2016 to a minimum of 9.2 percent under the test’s most extreme hypothetical scenario – which includes, among other things, 10 percent unemployment, falling treasury rates, a 25 percent decline in home prices and a 35 percent drop in commercial real estate prices.

“Today’s results reaffirm that U.S. banks are strong and remain well positioned to continue playing their important role in accelerating economic growth,” said ABA President and CEO Rob Nichols. “From this solid foundation, the focus should now turn to what can be done to help U.S. banks promote economic growth even further.”

Even with the hypothetical declines, capital levels at the banks would still be much higher than they were following the 2008 financial crisis, when Tier 1 capital ratios for the firms fell to about 5.5 percent at the end of that year.