Fed Stress Test: US Banks Can Withstand $708 Billion in Losses
Large US banks can absorb more than $708 billion in losses during a severe global recession while continuing to lend to households and businesses. That conclusion comes from the Fed's annual stress test results released on Wednesday.<\/p>
Under the hypothetical scenario set by the Fed, all 32 banks tested remained above the regulatory minimum capital requirements. The scenario includes unemployment rising to 10%, commercial real estate prices falling 39%, and housing prices falling 30%.<\/p>
The key capital metric measuring the ability to absorb downside losses—common equity tier 1 (CET1) ratio—fell 1.6 percentage points in the test but remained well above the required minimum. Total projected losses are approximately $200 billion, with about $200 billion related to credit cards, about $160 billion from commercial and industrial loans, and about $75 billion from commercial real estate.<\/p>
Fed Vice Chair for Supervision Michelle Bowman said: "Today's results highlight the resilience of the banking system."<\/p>
The annual test comes at a key moment for bank regulation. Unlike previous years, this year's results will not affect the capital levels that large banks are required to hold. That's because the Fed said in February it would keep the stress test buffer unchanged until 2027, before regulators adjust their methodology and hear from the industry. The move could change the amount of capital institutions will need to set aside for future recessions.<\/p>
KBW analysts described this year's test as a "walkthrough" in a June 21 research note. They expect banks to focus more on the Basel III Endgame proposal, expected to be released later this year, rather than the stress test results themselves.<\/p>
KBW estimates that if this year's results were incorporated into capital requirements, Morgan Stanley, Citigroup, Citizens Financial, and KeyCorp could see larger reductions in their capital buffers.<\/p><\/article>
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