Federal Reserve Stress Test: Major U.S. Banks Can Absorb $708 Billion in Losses

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

In the Fed's hypothetical scenario, all 32 banks examined still meet the regulatory minimum capital requirements. The scenario includes unemployment rising to 10%, commercial real estate prices falling 39%, and home prices falling 30%.

One key capital measure that reflects a bank's ability to absorb losses in a downturn — the industry's Common Equity Tier 1 (CET1) ratio — fell by 1.6 percentage points during the test, but remained well above the required minimum. On a projected loss basis, the total includes roughly $200 billion tied to 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 matters more. Unlike in prior years, the results will not affect the amount of capital large banks must hold. That is because in February the Fed said it would keep the stress capital buffer unchanged through 2027, while regulators redo the methodology and consider the industry's requests. That change could alter how much capital firms need to set aside for the next downturn.

In a research note published on June 21, KBW said this year's stress test had more of a “pro forma” feel, and it expects banks to focus on the Basel III Endgame proposal due later this year rather than on the stress test results themselves.

KBW estimated that if this year's results were folded into capital requirements, banks such as Morgan Stanley, Citigroup, Citizens Financial and KeyCorp could see relatively larger reductions in their capital buffers.