According to the Federal Reserve’s annual stress test released this week, the nation’s biggest banks would be able to absorb more than $708 billion in losses in a severe global recession while still lending to households and businesses.
All 32 banks examined by the Federal Reserve remained above their minimum capital requirements under the regulator’s hypothetical scenario, which included unemployment surging to 10%, a 39% drop in commercial real estate prices, and a 30% decline in home prices, the Fed said.
“Today’s results underscore the strength of the banking system,” Federal Reserve Vice Chair for Supervision Michelle Bowman said in a release.
The industry’s common equity tier 1 capital ratio, a key capital measure that would absorb losses in a downturn, fell by 1.6 percentage points during the exercise, remaining above required minimums, the Fed noted. It said that projected losses for the group included about $200 billion tied to credit cards, $160 billion from commercial and industrial loans, and $75 billion from commercial real estate.
Fed Leaves Stress Test Buffers Untouched
CNBC said the annual exercise comes at a key time for bank regulation because, unlike in previous years, the results won’t affect the amount of capital large banks are required to hold.
That’s because in February, the Fed said that it would leave the stress test buffers untouched until 2027 as regulators rework the methodology, heeding industry complaints. It was a move that could eventually reshape how much capital firms must hold against future downturns, CNBC reported.
In a research note that described this year’s exercise as “going through the motions,” KBW analysts led by Christopher McGratty said banks likely will remain focused on the pending Basel III Endgame proposal expected later this year rather than the stress test results themselves, CNBC said.
KBW estimated that had this year’s results counted toward capital requirements, Morgan Stanley, Citigroup, Citizens Financial, and KeyCorp would have seen some of the largest reductions in capital buffers.
