The Federal Reserve Board published a FEDS Note extending its Forward-Looking Analysis of Risk Events (FLARE) stress testing model to simulate a system-wide funding shock driven by higher costs on uninsured deposits. Using the Board’s 2024 stagflation exploratory scenario and the 2024 supervisory severely adverse scenario, the analysis finds the shock reduces profitability and capital most in a high interest rate environment, but only moderately lowers aggregate regulatory capital ratios even in the stagflation case. The model links funding stress to a mark-to-market capital measure, market-adjusted Common Equity Tier 1 (MACET1), and to reliance on uninsured deposits. Banks with MACET1 ratios of 7 percent or less are assumed to face higher uninsured deposit costs, with uninsured deposits repriced to the 3-month Treasury yield plus 50 basis points, rising in intensity as MACET1 falls and reaching full repricing at or below 2.5 percent; around one-fifth of banks are below or at the 7 percent cutoff at the 2024:Q4 jump-off used in the projections through 2027:Q1. In the stagflation scenario, higher yields both increase repricing costs and erode MACET1, pushing more banks into the shock and compressing system net interest margins and return on assets; sensitivity tests show that higher repricing rates can lower post-stress minimum banking system CET1 and MACET1 ratios by more than 1 percentage point in stagflation, and raising the MACET1 threshold for repricing from 7 percent to 12 percent reduces banking system CET1 and MACET1 ratios by about 0.5 percentage points.
Federal Reserve Board 2026-02-17
Federal Reserve Board research models uninsured-deposit funding shocks and finds the largest profitability and capital hits in high-rate stagflation scenarios
The Federal Reserve Board's FEDS Note extends the FLARE stress testing model to simulate a system-wide funding shock from higher uninsured deposit costs, using 2024 stagflation and severely adverse scenarios. Profitability and capital are most affected in high interest rate environments, with moderate impacts on aggregate regulatory capital ratios. Banks with market-adjusted Common Equity Tier 1 (MACET1) ratios of 7% or less face increased costs, with sensitivity tests indicating significant impacts on banking system CET1 and MACET1 ratios.