Large banks pass stress testing, including commercial real estate value decline, Fed says

All 23 large banks subject to annual stress testing passed the evaluation, the Federal Reserve said June 28 in reporting the 2023 results.

According to the Fed, this year’s test (administered earlier this year) included a severe global recession with a 40% decline in commercial real estate prices, a substantial increase in office vacancies, and a 38% decline in house prices. The unemployment rate, under the test scenario, rose by 6.4 percentage points to a peak of 10% and economic output declines commensurately.

“The test’s focus on commercial real estate shows that while large banks would experience heavy losses in the hypothetical scenario, they would still be able to continue lending,” the Fed said in releasing the results. The Fed noted that banks tested hold about 20% of the office and downtown commercial real estate loans held by banks.

“The large projected decline in commercial real estate prices, combined with the substantial increase in office vacancies, contributes to projected loss rates on office properties that are roughly triple the levels reached during the 2008 financial crisis,” the Fed added.

All 23 banks tested remained above their minimum capital requirements during the hypothetical recession, the Fed said, despite total projected losses of $541 billion. Under stress, the aggregate common equity risk-based capital ratio—which provides a cushion against losses—is projected to decline by 2.3 percentage points to a minimum of 10.1%.

According to the Fed, the $541 billion in total losses includes more than $100 billion in losses from commercial real estate and residential mortgages, and $120 billion in credit card losses, both higher than the losses projected in last year’s test. “The aggregate 2.3 percentage point decline in capital is slightly less than the 2.7 percentage point decline from last year’s test but is comparable to declines projected from the stress test in recent years,” the agency noted.

This year’s test also included for the first time, the Fed said, an exploratory market shock on the trading books of the largest banks, testing them against greater inflationary pressures and rising interest rates. “This exploratory market shock will not contribute to banks’ capital requirements but was used to further understand the risks with their trading activities and to assess the potential for testing banks against multiple scenarios in the future,” the agency said. “The results showed that the largest banks’ trading books were resilient to the rising rate environment tested.”

Individual results from the stress test figure directly into a bank’s capital requirements, the agency said, which mandate each bank hold enough capital to survive a severe recession and financial market shock. 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 noted.

Banks subject to the test included:

  • Bank of America Corporation
  • The Bank of New York Mellon Corporation
  • Barclays US LLC
  • BMO Financial Corp.
  • Capital One Financial Corporation
  • The Charles Schwab Corporation
  • Citigroup Inc.
  • Citizens Financial Group, Inc.
  • Credit Suisse Holdings (USA), Inc.
  • DB USA Corporation
  • The Goldman Sachs Group, Inc.
  • JPMorgan Chase & Co.
  • M&T Bank Corporation
  • Morgan Stanley
  • Northern Trust Corporation
  • The PNC Financial Services Group, Inc.
  • RBC US Group Holdings LLC
  • State Street Corporation
  • TD Group US Holdings LLC
  • Truist Financial Corporation
  • UBS Americas Holding LLC
  • U.S. Bancorp
  • Wells Fargo & Company

2023 Federal Reserve Stress Test Results (PDF)