Fed says largest, most complex banks could withstand severe hypothetical recession

The nation’s largest and most complex banks have strong capital levels that would allow them to stay well above their minimum requirements after being tested against a severe hypothetical recession, the Federal Reserve said in announcing the results of this year’s supervisory stress tests.

The most severe hypothetical scenario projects $410 billion in total losses for the 18 participating bank holding companies. This scenario featured a global recession with the U.S. unemployment rate rising by more than 6 percentage points to 10 percent, accompanied by a large decline in real estate prices and elevated stress in corporate loan markets.

The firms’ aggregate common equity tier 1 capital ratio, which compares high-quality capital to risk-weighted assets, would fall from an actual level of 12.3 percent in the fourth quarter of 2018 to a minimum level of 9.2 percent. Since 2009, the common equity capital at the 18 firms has increased by more than $680 billion.

Loan losses in this year’s stress test are broadly comparable to those from past years, the Fed reported in its release on this year’s results. Credit card loans showed the highest losses, followed by commercial and industrial loans, it said.

The stress-test results – required by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (and referred to as the Dodd-Frank Act Stress Tests, or DFAST) – were from the ninth round of stress tests since 2009 and the seventh round required by the Dodd-Frank Act.

This year, only the largest and most complex banks – generally those with total consolidated assets of $250 billion or more – are subject to stress testing, the Fed has noted. The agency said the firms tested represent about 70% of the assets of all banks operating in the U.S. The Federal Reserve uses its own independent projections of losses and incomes for each firm.

Federal Reserve Board releases results of supervisory bank stress tests

2019 stress test results

Be the first to comment

Leave a Reply

Your email address will not be published.