Federal Reserve Board stress test finds all 32 large banks remain above minimum capital requirements in severe recession scenario

The Federal Reserve Board published the results of its annual bank stress test, finding that all 32 large banks tested remained above their minimum common equity tier 1 capital requirements under a hypothetical severe global recession. In aggregate, the banks were projected to absorb more than USD 708 billion in loan losses, while their capital ratio fell by 1.6 percentage points and stayed above minimum requirements. The Board also said these results will not change large bank capital requirements, which have been published separately and will remain in place until 2027. This year’s scenario was similar in severity to the prior test and assumed a 39 percent drop in commercial real estate prices, a 30 percent decline in house prices, and unemployment rising to a peak of 10 percent alongside a commensurate fall in economic output. The Board said two factors increased the decline in aggregate capital relative to last year, namely higher projected loan losses from larger loan balances and more severe assumptions for some variables, and lower projected unrealized gains on securities because the scenario assumed smaller interest rate declines. Those effects were more than offset by higher projected interest income, reflecting recent bank financial performance and the smaller hypothetical rate declines. Projected losses included about USD 200 billion on credit cards, USD 160 billion on commercial and industrial loans, and USD 75 billion on commercial real estate. Current capital requirements will remain unchanged until 2027, when the stress test is due to be run using loss-estimating models that incorporate public feedback.