The Federal Reserve (Fed) recently released the results of its annual stress test on large banks in the U.S. and all 23 banks tested passed easily. Specifically, all 23 banks exceeded their minimum capital levels after being put through the hypothetical ‘severely adverse scenario’ that envisioned a deep global recession, generating $541 billion in aggregate bank losses.
The key factors in the stress test included a hypothetical 6.4% rise in unemployment (peaking at 10%), a 40% decline in commercial real estate (CRE) prices, and a 38% decline in house prices. These losses of over half a trillion dollars would decrease the banks’ aggregate common tier 1 (CET1) capital by 2.3%, resulting in a minimum CET1 ratio of 10.1%—still a healthy double-digit level, and more than twice the minimum regulatory capital ratio. This 2.3% CET1 drop is less than the 2.7% drop experienced in the 2022 stress test. All other stressed capital and leverage ratio targets were also comfortably exceeded.
The results of the tests are comforting after the banking concerns that arose earlier this year. Moreover, while not subject to these tests, U.S. bank regulators are considering a range of actions to further strengthen the financial system, including the potential for smaller banks to undergo annual testing as well.
These test results demonstrate the robust creditworthiness of U.S. banks. While there may still be concerns around some of the smaller regional banks, the large banks are the largest issuers of preferred lending, and given the recent results of the stress tests, are seemingly in good shape.
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