Some of the nation’s largest financial institutions are “well positioned to weather a severe recession” and continue lending activities, based on the results of the latest annual stress tests administered by the Federal Reserve.
This year’s hypothetical scenario included a major global recession with a 39 percent reduction in commercial real estate prices, a 30 percent drop in house prices and the unemployment rate rising to a peak of 10 percent with a commensurate drop-off in economic output.
The 32 participating banks had to demonstrate whether they could absorb more than $708 billion in total loan losses. Each of them remained above their minimum common equity tier 1 capital requirements with only 1.6 percentage points in aggregate capital decline.
The total projected losses include approximately $200 billion in credit card losses, $160 billion in losses related to commercial and industrial loans and $75 billion in losses from commercial real estate.
“Today’s results underscore the strength of the banking system,” Fed Vice Chair for Supervision Michelle Bowman said in a press release. “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 Fed highlighted the following three main factors, which influenced the results of this year’s test, two of which led to a larger decline in the aggregate capital ratio than last year:
- “Projected capital decreased from higher loan losses due to increased loan balances and the increased severity of certain scenario variables;
- “Projected capital decreased from lower projected unrealized gains in bank securities due to smaller hypothetical declines in interest rates during the scenario; and
- “Projected capital increased from higher interest income due to recent bank financial performance and smaller hypothetical declines of interest rates during the scenario.”
The Fed noted 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 agency also reiterated its previous statement that this year’s results will not impact large bank capital requirements determined by the Dodd-Frank Act Stress Test, which is conducted biennially.