Fed: Most Banks Remain ‘Sufficiently Capitalized’ in COVID Stress Scenarios

All 33 banks participating in the Federal Reserve’s 2020 supervisory stress tests would remain above minimum regulatory capital levels under three COVID-related downside scenarios, and “the large majority of banks remain sufficiently capitalized over the entirety of the projection horizon in all scenarios,” the Fed said today.

“The banking system has been a source of strength during this crisis,” commented Fed Vice Chairman for Supervision Randal Quarles. “The results of our sensitivity analyses show that our banks can remain strong in the face of even the harshest shocks.”

With the economic situation triggered by the coronavirus pandemic and public health response substantially more adverse than the 2020 stress tests’ “severely adverse” scenario on several dimensions, the Fed added a sensitivity analysis to this year’s tests examining bank performance in three potential COVID-19 scenarios. In the aggregate, minimum common equity Tier 1 capital ratios would be 9.5% (for a so-called V-shaped recovery), 8.1% (U-shaped) and 7.7% (W-shaped, with a second COVID surge in late 2020). The sensitivity analysis did not incorporate the effects of government supports, such as economic impact payments, expanded unemployment coverage or the Paycheck Protection Program.

“The Federal Reserve’s latest stress test results affirm that the nation’s largest banks continue to be a source of strength for the economy and remain well prepared to handle a range of potential economic shocks,” said ABA President and CEO Rob Nichols. “As the results make clear, even under the most adverse hypothetical scenarios banks will continue to help the nation overcome the economic challenges posed by the pandemic.”

Given the uncertainty of the paths of both the economy and the pandemic, the Fed board required large banks to preserve capital in the third quarter by suspending share repurchases (an action voluntarily taken by the eight U.S. global systemically important banks in March), capping dividends and basing future dividends on an income-based formula.

All participating banks will be required to resubmit their capital plans later this year, the Fed said, adding that the Fed will evaluate bank performance on a quarterly basis. The Fed added that the results of its pre-coronavirus stress test scenarios, which showed banks remaining strongly capitalized, would be used to set the stress capital buffer for covered firms.