Fed stress test shows big U.S. banks can withstand $708 billion in losses

Fed Vice Chair for Supervision Michelle Bowman said in a news release: “Today’s results highlight the resilience of the banking system.”

According to the Federal Reserve’s annual stress test released Wednesday, the largest U.S. banks would be able to absorb more than $708 billion in losses while continuing to lend to households and businesses under a hypothetical severe global recession.

All 32 banks examined by the Fed remained above the minimum capital requirements set by regulators. The scenario included unemployment rising to 10%, commercial real estate prices falling 39%, and home prices falling 30%.

The key capital metric used to measure a bank’s ability to absorb losses, the common equity tier 1 capital ratio, fell by 1.6 percentage points in the test but remained well above the required minimum.

Of the industry’s projected total losses, about $200 billion came from credit-card-related assets, about $160 billion from commercial and industrial loans, and about $75 billion from commercial real estate exposures.

This year’s annual test comes at a key moment for bank regulation. Unlike in prior years, the results will not affect how much capital large banks must hold.

That is because in February the Fed said it would keep the stress capital buffer unchanged through 2027 while regulators redo the methodology and consider industry complaints. The change could reshape how much capital financial institutions must hold for future recessions.

In a June 21 research note, KBW analysts described this year’s stress test as a “formality.” They expect banks to focus more on Basel III Endgame, due later this year, than on the stress test result itself.

KBW estimates that if this year’s result were folded into capital requirements, firms such as Morgan Stanley, Citigroup, Citizens Financial and KeyCorp could see sizable cuts to their capital buffers.