Risk & Compliance

Largest U.S. Banks Pass Latest Stress Tests

The banks' projected capital cushions in the event of a severe recession all exceeded the Fed's minimum requirements.
Katie Kuehner-HebertJune 27, 2016

All of the largest U.S. bank holding companies continue to build  capital levels and improve credit quality, increasing their ability to survive a severe recession, according to the results of the Federal Reserve’s latest stress tests.

The most severe hypothetical scenario projects that loan losses at the 33 participating bank holding companies would total $385 billion during the nine quarters tested. The “severely adverse” scenario projects a severe global recession with the domestic unemployment rate rising five percentage points, accompanied by a heightened period of financial stress and negative yields for short-term U.S. Treasury securities.

Even with those losses, the Fed said, the banks would have enough capital to meet the minimum regulatory requirements.

In the severely adverse scenario, the firms’ aggregate common equity tier 1 capital ratio, which compares high-quality capital to risk-weighted assets, would drop to a low of 8.4% — well above the 4.5% minimum set by regulators.

This is the sixth round of stress tests conducted by the Fed since 2009 and the fourth round required by the Dodd-Frank financial reforms.

As The New York Times reports, the results run counter to the widespread public perception that not enough has been done to overhaul the institutions that are “too big to fail.”

The latest tests show “how much progress the regulators have made in pushing banks to beef up the capital buffers that will protect the financial system in any future crisis,” the Times said.

Another measure used by the Fed —  the Tier 1 leverage ratio — declined to 6.7% in the worst-case scenario of the stress test. The Fed’s minimum is 4%.

This years’ tests were “arguably the most stressful stress tests yet,” Mark Zandi, Moody’s Analytics chief economist, told the Times, noting that the big banks hypothetically had to “weather a downturn more severe than the Great Recession.”

On Wednesday, the Fed will release results of a more comprehensive test that analyzes whether banks can buy back as much stock and pay out as many dividends as they had planned.