The Federal Reserve Board has announced the results of its annual bank stress test, revealing that large banks are well-equipped to handle a severe recession. These banks are expected to maintain capital levels above the minimum requirements while continuing to provide loans to households and businesses.
In this year's hypothetical recession scenario, there is an aggregate decline of 1.8 percentage points in the common equity tier 1 (CET1) capital ratio, which acts as a buffer against potential losses. The Board had proposed a rule in April to average stress test results over two years to mitigate volatility in calculating a firm's capital requirement. If implemented, this would result in an aggregate capital decline of 2.3 percentage points when combined with the 2024 results.
The smaller decrease observed this year compared to previous years reflects some unintended volatility within the models used for stress testing. The Board plans to address these issues by seeking public feedback on its models and scenario design framework later this year.
"Large banks remain well capitalized and resilient to a range of severe outcomes," stated Vice Chair for Supervision Michelle W. Bowman. She noted that finalizing the proposal to average two consecutive years of stress test results could help manage excessive volatility.
All 22 banks included in the test remained above their minimum CET1 capital requirements under the stress scenario, despite facing projected hypothetical losses exceeding $550 billion.
This year's scenario was less severe than last year's due to the countercyclical nature of the stress tests. It envisages a global recession characterized by a 30 percent drop in commercial real estate prices and a 33 percent fall in house prices, with unemployment peaking at 10 percent following an increase of nearly 5.9 percentage points.
Projected losses totaling more than $550 billion include nearly $158 billion from credit card defaults, $124 billion from commercial and industrial loan losses, and $52 billion from commercial real estate.
Additionally, on Friday, the Board released corrected results for the 2024 stress tests after identifying modest errors in loss projections related to corporate and first-lien mortgage loans. These corrections did not affect the overall post-stress capital decline for that year.