The Federal Reserve Board’s annual bank stress test results confirm that large banks are well positioned to weather a severe recession.
The stress test’s hypothetical scenario featured a severe global recession with a 39 percent decline in commercial real estate prices and a 30 percent decline in house prices. The unemployment rate also increased to a peak of 10 percent, and economic output declined commensurately.
In this hypothetical recession, banks absorbed more than $708 billion in total loan losses but capital declined only 1.6 percentage points in aggregate, staying above minimum capital requirements. Overall, all 32 banks that were tested remained above their minimum common equity tier 1 capital requirements during this year’s hypothetical recession scenario.
“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.”
These results will not impact large bank capital requirements, as the Fed had decided that the current capital requirements will stay in place until 2027. At that time, the stress test will be run with loss-estimating models that take public feedback into consideration.
There were three main factors that influenced the results of this year’s test.
- 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 total projected losses include roughly $200 billion in credit card losses, $160 billion in losses from commercial and industrial loans, and $75 billion in losses from commercial real estate.