Fed: Banks Retain ‘Strong Capital Levels’ in Second Round of 2020 Stress Tests

In the second supervisory stress test of 2020, large banks maintained strong capital levels under two separate hypothetical economic downturns, the Federal Reserve said on Friday. “The banking system has been a source of strength during the past year and today’s stress test results confirm that large banks could continue to lend to households and businesses even during a sharply adverse future turn in the economy,” commented Fed Vice Chairman for Supervision Randal Quarles.

The stress test featured two scenarios: one with an employment rate spiking to 12.5% and declining to 7.5% and a second with unemployment peaking at 11% and declining more modestly to 9%. Under both scenarios, the 33 participating firms’ capital ratios would decline on average from 12.2% to 9.6% but collectively and individually remaining well above the minimum of 4.5%.

The Fed board voted to modify the restrictions on distributions imposed at the onset of the pandemic. For the first quarter of 2021, large banks’ dividends and share repurchases will be limited to an amount based on their income over the past year. Firms without income will not be able to pay a dividend or conduct buybacks. Meanwhile, the Fed voted to keep the countercyclical capital buffer at its current level of zero percent.