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.
Aggregate Tier 1 capital ratios at the 18 firms subjected to the Fed’s stress-test program would fall from an actual 12.3 percent in the fourth quarter of 2018 to a minimum of 9.2% under the test’s most extreme hypothetical scenario — which includes, among other things, a 10% unemployment rate accompanied by a large decline in real estate prices and heightened stress in corporate loan markets. 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 latest stress test results from the Federal Reserve confirm the health and strength of the U.S. banking system, and they demonstrate that the nation’s largest banks could weather a severe global recession and still serve their customers and communities,” said American Bankers Association President and CEO Rob Nichols, who observed that this year’s test was one of the toughest since the Federal Reserve began stress testing in 2009. “Even under this extreme and unlikely scenario, the results show banks would still hold more than enough capital to continue to fund the economy.”
Nichols also expressed support for recent actions by the regulatory agencies to better tailor the stress testing program based on risk and business model. “These changes make stress testing more valuable to both regulators and banks. We believe stress testing can be further enhanced by completing the stress capital buffer, which will simplify the large bank capital rules while preserving strong capital levels.”