Federal Reserve Board – Federal Reserve Board’s annual bank stress test confirms that large banks are well positioned to weather a severe recession and able to continue to lend to households and businesses

The results of the Federal Reserve Board’s annual banking stress test confirmed that big banks are well positioned to weather a severe recession and can continue lending to households and businesses. Despite absorbing more than $708 billion in total losses under this year’s hypothetical scenario, capital declined by just 1.6 percentage points overall, remaining above minimum capital requirements.

“Today’s results underscore the strength of the banking system,” said Vice President for Supervision Michelle W. Bowman. “As we work to increase the transparency and accountability of the stress test, public feedback will help us continue to improve and instill more confidence in the stress test and its results.”

Like the Board previously announcedtoday’s results will not affect the capital requirements of the big banks, which were published today. The current capital requirements will remain in place until 2027, when the stress test will be conducted using loss estimation models that take into account public feedback.

All 32 banks tested remained above the minimum Tier 1 capital requirements during this year’s hypothetical recession scenario, which was similar in severity to the previous test. This year’s hypothetical scenario included a severe global recession with a 39 percent drop in commercial real estate prices and a 30 percent drop in home prices. The unemployment rate also rose to a high of 10 percent, and economic output declined commensurately.

Three main factors influenced this year’s test results, two of which led to a larger decline in the aggregate capital ratio than last year, and one more that offset that decline:

• Projected capital decreased due to higher loan losses due to increased loan balances and increased severity of certain scenario variables;
• Projected capital decreased due to lower expected unrealized gains in bank securities due to smaller hypothetical declines in interest rates during the scenario; i
• The projected capital increased due to increased interest income due to recent bank financial performance and hypothetical minor interest rate falls during the scenario.

Total expected losses include approximately $200 billion in credit card losses, $160 billion in commercial and industrial loan losses, and $75 billion in commercial real estate losses.

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