Fed stress test: 32 banks can absorb $708 billion in losses

The Federal Reserve’s annual stress test showed that the biggest U.S. banks can absorb more than $708 billion in losses under a severe global recession scenario while continuing to lend to households and businesses.

All 32 banks reviewed by the Fed stayed above the regulator’s minimum capital requirements in the hypothetical scenario. The scenario included unemployment rising to 10%, commercial real estate prices falling 39%, and home prices dropping 30%.

One key capital measure of a bank’s ability to absorb losses in a downturn, the common equity tier 1 ratio, fell by 1.6 percentage points in the test but remained well above the required minimum. Projected losses for the industry included about $200 billion from credit cards, $160 billion from commercial and industrial loans, and $75 billion from commercial real estate.

Federal Reserve Vice Chair for Supervision Michelle Bowman said in a statement: “Today’s results underscore the resilience of the banking system.”

The annual test comes at a pivotal moment as regulators are changing their approach. Unlike in prior years, the results will not affect how much capital large banks must hold.

That is because in February the Fed said it would keep stress test buffers unchanged until 2027 while regulators redesign the method. The move answered industry complaints and could reshape how much capital banks must hold against a future recession.

In a research note released on June 21, KBW analysts led by Christopher McGratty described this year’s test as a “formality.” They said banks may focus more on the Basel III Endgame proposal expected later this year than on the stress test results themselves.

KBW estimated that if this year’s results were factored into capital requirements, Morgan Stanley, Citigroup, Citizens Financial and KeyCorp could see some of the largest reductions in capital buffers.