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Fed stress test shows large banks can weather a severe recession

The Fed said the 32 banks tested remain above minimum common equity tier 1 capital requirements even after absorbing more than $708 billion in projected losses.

Reported · Written up by our desk · Economy

The Federal Reserve said the results of its annual bank stress test found large banks are well positioned to handle a severe recession while continuing to lend to households and businesses, even under a hypothetical downturn.

The Fed reported that, in aggregate, capital declined only 1.6 percentage points despite banks absorbing more than $708 billion in total losses in this year's stress scenario. Vice Chair for Supervision Michelle W. Bowman said the results underscore the banking system's strength, and that public feedback will help improve the stress test's transparency and accountability.

According to the Fed, all 32 banks tested stayed above their minimum common equity tier 1 capital requirements during the hypothetical recession, which it described as similar in severity to the prior test. The scenario included a 39 percent decline in commercial real estate prices and a 30 percent decline in house prices, with unemployment peaking at 10 percent and economic output falling accordingly.

The Fed also broke down projected losses of roughly $200 billion in credit card losses, $160 billion from commercial and industrial loans, and $75 billion from commercial real estate. The central bank said the published stress test results will not affect large bank capital requirements, which it said will remain in place until 2027, when the stress test will use loss-estimating models updated with public feedback.

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