All banks subject to this year’s stress tests remained above their minimum capital requirements, reaching a minimum of 9.7% – more than double the minimum requirement – despite total projected losses in the test scenario of $612 billion, the Federal Reserve said Thursday.
However, the Fed noted, the banks also saw a larger capital decline from this year’s tests than in the previous year.
In announcing the results of annual stress tests, conducted among 34 large banks with assets of more than $100 billion earlier this year, the Fed said that under stress, the aggregate common bank equity capital ratio is projected to decline by 2.7 percentage points to a minimum of 9.7%, which the agency noted is more than two times the minimum required.
This year’s tests measured the impact on the 34 large banks of a severe global recession with heightened stress in commercial real estate and corporate debt markets. In addition, banks with large trading operations were tested against a global market shock component that primarily stressed their trading positions; banks with substantial trading or custodial operations were tested against the default of their largest counterparty.
The central bank said the tests showed that under the scenario, total losses were largely driven by more than $450 billion in loan losses and $100 billion in trading and counterparty losses. This year, the Fed said, the larger banks saw an increase of more than $50 billion in losses compared to the previous year’s test. “Additionally, the aggregate 2.7% decline in capital is slightly larger than the 2.4% decline from last year’s test but is comparable to recent years,” the Fed added.
The Fed said that stress test results will factor directly into an individual bank’s capital requirements, mandating each bank to hold enough capital to survive a severe recession. “If a bank does not stay above its capital requirements, it is subject to automatic restrictions on capital distributions and discretionary bonus payments,” the Fed added.
Federal Reserve Board releases results of annual bank stress test, which show that banks continue to have strong capital levels, allowing them to continue lending to households and businesses during a severe recession