The Federal Reserve (Fed) on Friday (June 27) released the annual stress test results, showing that all 22 large banks with assets exceeding $100 billion have passed. This indicates that these banks have sufficient capital to continue providing loans to households and businesses even in the face of a severe economic recession and financial market turmoil. This also paves the way for future increases in shareholder dividends and regulatory relaxation.
According to the results released by the Federal Reserve, under the assumed “severely adverse scenario” where the global economy enters a downturn and unemployment rises to 10%, the 22 large banks would collectively incur losses of over $550 billion. However, the core capital of the large U.S. banks, measured by the Common Equity Tier 1 ratio (CET1), only declined by an average of 1.8 percentage points, still more than twice the regulatory minimum threshold at 11.6%.
CET1 is considered a crucial indicator for measuring a bank’s ability to absorb significant losses.
Michelle Bowman, Vice Chair for Supervision at the Federal Reserve, stated: “Large banks still have sufficient capital and resilience to withstand various severe outcomes.”
The economic scenarios assumed in this year’s stress test include a deep global economic recession, a 30% decline in commercial real estate prices, a 33% drop in home prices, and an increase in the unemployment rate by nearly 6 percentage points to 10%.
Under these conditions, economic output significantly contracts, leading to severe turmoil in the financial markets with a 50% stock market plunge, substantial selling of corporate bonds, and investment-grade bond spreads widening to 5%.
The Federal Reserve stated that these scenarios would put comprehensive stress on banks’ assets and capital levels.
In the aforementioned scenarios, the Federal Reserve estimates that the banking system would face significant losses. Credit card loan losses would reach $157 billion, commercial and industrial loan losses $124 billion, and commercial real estate loan losses $52 billion. These figures highlight that during financial crises, consumer credit and corporate financing risks pose major impacts on bank capital.
The Federal Reserve indicated that due to factors such as model sensitivity, the volatility of capital requirements estimated year on year fluctuates significantly.
To enhance stability, the Federal Reserve is considering introducing a new rule to average the results of stress tests from two years to reduce “excessive volatility” and serve as a more stable capital adequacy assessment indicator. This reform will also be accompanied by easing some regulatory reporting obligations.
Bowman stated that this change would help provide a “more stable and reliable” regulatory basis.
Meanwhile, as part of the Trump administration’s push to ease regulations and promote economic growth policies, the Federal Reserve and other federal regulatory agencies are planning to revise the “Enhanced Supplementary Leverage Ratio” (eSLR) established after the financial crisis to reduce regulatory barriers for banks holding low-risk assets such as U.S. Treasury bonds, ensuring that banks can effectively play an intermediary role in the Treasury market.
Since the 2008 financial crisis, the Federal Reserve has conducted stress tests annually on banks with total assets exceeding $100 billion to assess their risk tolerance in times of severe economic deterioration.
Most of these banks are classified as “Global Systemically Important Banks” (G-SIBs) and serve as crucial pillars of the financial system. In contrast, medium and small-sized banks are only required to undergo testing every two years.
This round of testing not only demonstrates the soundness of capital in large US banks but also provides a basis for future capital policies, dividend planning, and regulatory adjustments. It is widely expected that following the test clearance, major banks will announce new rounds of dividend payouts and buyback plans.
(Resources from related reports from English Epoch Times were used in parts of this article.)