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

The Federal Reserve’s annual stress tests show that under a severe global recession scenario, major U.S. banks can absorb more than $708 billion in losses while continuing to lend to households and businesses.

Of the 32 banks reviewed by the Fed, all remained above minimum capital requirements under the regulatory scenario. The scenario included unemployment rising to 10%, commercial real estate prices falling 39%, and home prices dropping 30%.

The key capital measure that shows how much loss a bank can absorb in a recession - the industry’s common equity tier 1 ratio - fell by 1.6 percentage points during the test, but still remained well above the required minimum. The expected losses for the banking groups were about $200 billion from credit cards, $160 billion from commercial and industrial loans, and $75 billion from commercial real estate.

Michelle Bowman, the Fed’s vice chair for supervision, said in a statement, “Today’s results highlight the strength of the banking system.”

The annual test comes at a key moment for bank regulation. Unlike in prior years, this year’s 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.

KBW analysts described this year’s test as “a formality” in a research note on June 21. They said banks may care more about the Basel III Endgame proposal expected later this year than about the stress test results themselves.

KBW estimates that if this year’s results were included in capital requirements, Morgan Stanley, Citigroup, Citizens Financial and KeyCorp could see some of the largest reductions in capital buffers.