Federal Reserve stress test: 32 banks can withstand $708 billion in losses

The Federal Reserve's annual stress test shows that under an extreme global recession scenario, major U.S. banks could still absorb more than $708 billion in losses while continuing to lend to households and businesses.

In the regulatory hypothetical scenario, all 32 banks assessed by the Fed remained above the minimum regulatory capital requirement. The assumptions included unemployment rising to 10%, commercial real estate prices falling 39%, and home prices falling 30%.

The key capital measure used to gauge loss absorption in a downturn—the Common Equity Tier 1 ratio (CET1)—fell by 1.6 percentage points in the test, but remained well above the required minimum. On an aggregate basis, estimated losses included about $200 billion from credit cards, about $160 billion from commercial and industrial loans, and about $75 billion from commercial real estate.

Michelle Bowman, the Fed's vice chair for supervision, said in a statement: “Today's results underscore the resilience of the banking system.”

This year's annual test comes at a pivotal moment for bank supervision. Unlike in previous years, the test results will not affect the amount of capital large banks are required to hold.

That is because in February, the Fed said it would keep the stress capital buffer unchanged until 2027 while it reworks its supervisory approach, in response to industry feedback. The change could alter the amount of capital institutions will need to hold in future downturns.

KBW described this year's test as “a formality” in a research note released on June 21. Analyst Christopher McGratty said banks may be more focused on the Basel III Endgame proposal expected later this year than on the stress test results themselves.

KBW estimated that if this year's test results were incorporated into capital requirements, Morgan Stanley, Citigroup, Citizens Financial, and KeyCorp could see sizable reductions in their capital buffers.