Dive Brief:
- The Federal Reserve’s annual bank stress test exercise confirmed the biggest U.S. banks can withstand about $708 billion in losses, under a hypothetical severe global recession scenario, the central bank said Wednesday.
- The results don’t affect banks’ minimum regulatory capital requirements this year, though, in light of the Fed’s freeze of 2025 stress capital buffers. In February, the Fed said it would maintain current stress capital buffer requirements until 2027 as regulators pursue changes to the stress testing process.
- The results “underscore the strength of the banking system,” Vice Chair for Supervision Michelle Bowman said in a news release. “As we work to increase the transparency and accountability of the stress test, public feedback will help us continue to improve and instill greater confidence in the stress test and its results.”
Dive Insight:
Under the hypothetical recession – similar in severity to the previous year’s test – all 32 stress-tested banks stayed above their minimum common equity tier 1 capital requirements, the Fed said. Capital dipped about 1.6 percentage points under the scenario, from 12.8% to 11.2%.
The hypothetical recession included a 39% decline in commercial real estate prices, a 30% drop in home prices and an unemployment rate that peaked at 10%.
Projected losses include about $200 billion in credit card losses, $160 billion in losses from commercial and industrial loans and $75 billion in CRE losses, the Fed said.
Results were generally positive, with lower projected stress losses across most banks, but the outcome was largely anticipated going in, wrote Oppenheimer analyst Chris Kotowski.
Last year, the Fed proposed changes it said were intended to reduce year-to-year fluctuations of stress capital buffer requirements and increase transparency around stress testing.
Rob Nichols, CEO of the American Bankers Association, said the trade group has provided “extensive input” throughout the Fed’s process to revamp stress testing. “We are encouraged by the Fed’s continued progress and will continue to engage with policymakers to ensure the stress testing framework accurately reflects risk while supporting banks’ ability to meet the needs of their customers and communities,” he said in a Wednesday statement.
Christopher Appel, director of banking policy at financial reform nonprofit Better Markets, blasted the current state of stress testing, saying Wednesday a “stress test without consequences is a box-checking exercise that gives the public false assurance while leaving the financial system exposed.”
This year, Citi, Morgan Stanley, Citizens, Capital One, Fifth Third and KeyBank saw some of the strongest stress capital buffer improvements, while first-timer First Citizens had the weakest results. JPMorgan Chase and Goldman Sachs also saw modest increases to their stress capital buffers.
“Large regionals improved most, trust banks saw bigger drawdowns and negative outliers were limited. The main question is whether results carry much information value,” since major changes like a pre-provision net revenue overhaul will come next year, in addition to Basel III and global systemically important bank surcharge changes, Truist Securities analyst John McDonald wrote in a note Wednesday.
“Moving forward, the main debates will be a) the timelines for finalizing stress test changes, and b) the substance of changes, particularly in light of the new Basel III proposal,” McDonald wrote.
Shortly after the Fed released results, big banks announced quarterly dividend increases or share repurchase programs, including JPMorgan, Wells, Citi, Goldman, Morgan Stanley and U.S. Bank.
