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

The Federal Reserve said in its annual stress test report released Wednesday that, under a severe global recession scenario, large U.S. banks could absorb more than $708 billion in losses while continuing to lend to households and businesses.

All 32 banks reviewed by the Fed stayed above the minimum capital standards required by regulators in the assumed scenario, which included unemployment rising to 10%, commercial real estate prices falling 39%, and home prices dropping 30%.

The key capital metric that measures a bank's ability to absorb losses in a downturn, the common equity tier 1 capital ratio, fell by 1.6 percentage points in this test but still remained well above the minimum requirement. Expected losses in the sector totaled about $200 billion in credit card losses, $160 billion in commercial and industrial loan losses, and $75 billion in commercial real estate losses.

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 time. Unlike in past years, the results will not affect the amount of capital large banks must hold. In February, the Fed said it would keep the stress capital buffer unchanged until 2027 while regulators redesign the methodology, responding to industry complaints. That shift could change how much capital financial firms must hold for the next downturn.

In a research note released June 21, KBW analysts Christopher McGratty and others described this year's test as a “rubber stamp.” They argued that banks are more likely to focus on the Basel III Endgame proposal expected later this year than on the stress test results themselves.

KBW estimated that if this year's results were counted in capital requirements, Morgan Stanley, Citigroup, Citizens Financial, and KeyCorp would see some of the largest cuts in capital buffers.