Fed says banks showed continued strength in 2021 stress tests; ends restrictions set after 2020 tests

The 23 banks that participated in the 2021 stress tests by the Federal Reserve demonstrated continued strong capital levels and the continued ability to lend during a hypothetical severe recession, the Fed said Thursday. It said the additional restrictions imposed during the COVID event “will end.”

“All large banks will be subject to the normal restrictions of the Board’s stress capital buffer, or SCB, framework,” the Fed said.

In this year’s stress tests, the Fed said, all 23 banks tested remained well above their risk-based minimum capital requirements.

“Over the past year, the Federal Reserve has run three stress tests with several different hypothetical recessions and all have confirmed that the banking system is strongly positioned to support the ongoing recovery,” Fed Vice Chair for Supervision Randal Quarles said in a statement for Thursday’s release.

In addition to the regularly scheduled 2020 stress test, the Fed last year also conducted a sensitivity analysis that addressed added scenarios and had banks perform a second round of stress testing in December.

Stress test results released last June led to the Fed requiring all 34 banks tested to preserve capital by suspending share repurchases and capping dividend payments for the third quarter. In December, despite capital levels remaining above minimums in the second test, the Fed continued restrictions on banks’ distributions to investors and share repurchases, with modifications; it left capital requirements unchanged.

The Fed Board’s stress tests help ensure that large banks can support the economy during economic downturns. The tests evaluate the resilience of large banks by estimating their losses, revenue, and capital levels—which provide a cushion against losses—under hypothetical scenarios over nine future quarters.

This year’s hypothetical scenario includes a severe global recession with substantial stress in commercial real estate and corporate debt markets. The unemployment rate rises by 4 percentage points to a peak of 10-3/4%. Gross domestic product falls 4% from the fourth quarter of 2020 through the third quarter of 2022. And asset prices decline sharply, with a 55% decline in equity prices.

Under that scenario, the Fed said, the 23 large banks would collectively lose more than $470 billion, with nearly $160 billion losses from commercial real estate and corporate loans. However, their capital ratios would decline to 10.6%, still more than double their minimum requirements.

The Fed Board on Thursday said it also corrected an error with the results for BNP Paribas USA from the June and December 2020 stress tests. “As a result, the projected pre-provision net revenue, projected pre-tax net income, and projected capital ratios were corrected,” it said.

Federal Reserve Board releases results of annual bank stress tests, which show that large banks continue to have strong capital levels and could continue lending to households and businesses during a severe recession