Large banks are well positioned to weather a severe recession and would be able to continue to lend to households and businesses, according to the results of the Federal Reserve’s annual stress tests, released today.
All 32 banks tested remained above their minimum common equity tier 1 capital requirements during this year’s hypothetical recession scenario, the Fed said. The scenario included a severe global recession with a 39% decline in commercial real estate prices and a 30% decline in house prices. The unemployment rate also increased to a peak of 10%, and economic output declined commensurately.
Despite absorbing more than $708 billion in total loan losses under this year’s hypothetical scenario, capital declined only 1.6 percentage points in aggregate, staying above minimum capital requirements.
“Today’s results underscore the strength of the banking system,” Vice Chair for Supervision Michelle Bowman said. “As we work to increase the transparency and accountability of the stress test, public feedback will help us continue to improve and instill greater confidence in the stress test and its results.”
The stress test results will not affect large bank capital requirements. The current capital requirements will stay in place until 2027, when the stress test will be run with loss-estimating models that take public feedback into consideration, the Fed said.
The results again demonstrate that America’s banking system remains strong, resilient and well capitalized to support our economy through a range of conditions, American Bankers Association President and CEO Rob Nichols said.
“We appreciate the Federal Reserve’s meaningful efforts to improve transparency and make stress testing more rational and predictable, something ABA has supported by providing extensive input throughout the process,” Nichols said. “We are encouraged by the Fed’s continued progress and will continue to engage with policymakers to ensure the stress testing framework accurately reflects risk while supporting banks’ ability to meet the needs of their customers and communities.”
