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 yesterday.
Aggregate Tier 1 capital ratios at the 35 firms subjected to the Fed’s stress-test program would fall from an actual 12.3 percent in the fourth quarter of 2017 to a minimum of 7.9 percent under the test’s most extreme hypothetical scenario — which includes, among other things, a 10 percent unemployment rate and a steepening Treasury yield curve. Even with these 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.
The Federal Reserve announced a significant policy change with the release of results. It stated that bank holding companies with less than $100 billion in total consolidated assets will no longer be subject to supervisory stress testing, including both the Dodd-Frank Act stress tests — a change called for by S. 2155 — and the Comprehensive Capital Analysis Review. The Fed noted that as a result, three firms were not included in this year’s results or in future cycles.
“The stress test results released today by the Federal Reserve demonstrate that the U.S. banking system remains well capitalized and adequately prepared to weather even a hypothetical global recession,” said ABA President and CEO Rob Nichols. “Today’s decision by the Federal Reserve to exclude bank holding companies with less than $100 billion in assets from the supervisory stress test and CCAR is an important step toward tailoring enhanced prudential standards.”
Nichols added that “the next step is for regulators to provide clarity, consistent with [S. 2155], that midsize banks and savings and loan holding companies with less than $50 billion in assets do not need to file their stress testing results in July. We look forward to working with regulators on these important changes going forward.”