Summary: The Fed’s annual stress test shows 32 banks still exceed minimum capital requirements under a severe scenario and could absorb $708 billion in losses, highlighting capital rule revisions and Basel III Endgame.
Federal Reserve stress test: U.S. big banks can withstand $708 billion in losses
The Federal Reserve's annual stress test shows that under a severe global recession scenario, America's largest banks could still absorb more than $708 billion in losses and continue lending to households and businesses.
Under the Fed's hypothetical scenario, all 32 banks under review remained above their minimum capital requirements. The scenario includes unemployment rising to 10%, commercial real estate prices falling 39%, and home prices dropping 30%.
The key capital measure used to gauge how much loss a bank can absorb in a downturn—the common equity tier 1 capital ratio—fell by 1.6 percentage points in this test, but still remained well above the required minimum. On a group basis, projected losses included about $200 billion from credit cards, $160 billion from commercial and industrial loans, and $75 billion from commercial real estate.
Michelle Bowman, the Fed's vice chair for supervision, said in a statement: “Today's results underscore the resilience of the banking system.”
This year's stress test comes at a pivotal moment for bank supervision. Unlike in prior years, the results will not affect the amount of capital large banks must hold. That is because the Fed said in February it would keep the stress capital buffer unchanged until 2027, while regulators rethink the methodology and consider industry feedback; future changes could affect the level of capital institutions must hold to weather a future downturn.
In a research note released on June 21, KBW described this year's test as a “formality.” Analysts said banks may continue focusing on Basel III Endgame proposals expected later this year, rather than on the stress test results themselves.
KBW estimated that if this year's results were incorporated into capital requirements, the capital buffers of Morgan Stanley, Citigroup, Citizens Financial, and KeyCorp could see sizable reductions.
