Fed stress tests confirm banks could continue lending during a ‘severe recession’

Large banks continued to maintain strong capital levels under a hypothetical severe global recession and substantial stress in commercial real estate and corporate debt markets, according to the results of Dodd-Frank Act-mandated stress tests, the Federal Reserve said today.

“Today’s stress test results from the Federal Reserve show that the nation’s largest banks remain well positioned to absorb a range of potential economic shocks while continuing to support their customers, clients and communities,” said ABA President and CEO Rob Nichols. “The industry’s strong balance sheets and high capital levels ensure banks can make the loans that drive our economy even if they face substantial headwinds.”

The stress test featured a scenario where unemployment rises by 5.75 percentage points, spiking to 10% and gross domestic product falls “commensurately,” along with a nearly 40% decline in CRE prices and a 55% decline in stock prices. Under the scenario, capital ratios at the participating banks would decline to a minimum 9.7%, which is still more than double their minimum requirements.

Results of these stress tests are used to help determine individual bank capital requirements.