All 23 large U.S. banks have passed the annual stress tests administered by the Federal Reserve Board.
“Over the past year, the Federal Reserve has run three stress tests with several different hypothetical recessions, and all have confirmed that the banking system is strongly positioned to support the ongoing recovery,” the Fed’s Vice Chair for Supervision Randal Quarles said.
All 23 of the large banks tested remained well above their risk-based minimum capital requirements. As a result, the additional restrictions put in place by the Fed during the COVID-19 pandemic will be lifted. That means that now, large banks will be subject to the normal restrictions of the Fed’s stress capital buffer framework.
Large banks are required to hold enough capital to survive a severe recession. If a bank does not stay above its capital requirements as established by the Fed, it is subject to automatic restrictions on capital distributions and discretionary bonus payments.
Specifically, the tests evaluate the resilience of large banks by estimating their losses, revenue, and capital levels—which provide a cushion against losses—under hypothetical scenarios over nine future quarters. The stress tests are designed to help ensure that large banks can support the economy during economic downturns.
This year’s hypothetical scenario includes a severe global recession with substantial stress in commercial real estate and corporate debt markets. In this scenario, the unemployment rate rose by 4 percentage points to a peak of 10.75 percent. Further, gross domestic product fell by 4 percent from the fourth quarter of 2020 through the third quarter of 2022. Also, the market suffered a 55 percent decline in equity prices.
In this hypothetical scenario, the 23 large banks would collectively lose more than $470 billion, with nearly $160 billion losses from commercial real estate and corporate loans. However, their capital ratios would decline to 10.6 percent, still more than double their minimum requirements.