27th June 2017

All participating US banks pass supervisory stress tests

The nation's largest bank holding companies have strong capital levels and retain their ability to lend to households and businesses during a severe recession, according to the results of supervisory stress tests released by the Federal Reserve Board.

The most severe hypothetical scenario projects $383bn in loan losses at the 34 participating bank holding companies during the nine quarters tested. The "severely adverse" scenario features a severe global recession with the US unemployment rate rising by approximately 5.25 percentage points to 10 per cent, accompanied by heightened stress in corporate loan markets and commercial real estate.

The firms' aggregate common equity tier 1 capital ratio, which compares high-quality capital to risk-weighted assets, would fall from an actual 12.5 per cent in the fourth quarter of 2016 to a minimum level of 9.2 per cent in the hypothetical stress scenario. Since 2009, the 34 firms have added more than $750bn in common equity capital.

"This year's results show that, even during a severe recession, our large banks would remain well capitalised," said Governor Jerome H. Powell. "This would allow them to lend throughout the economic cycle, and support households and businesses when times are tough."

This is the seventh round of stress tests led by the Federal Reserve since 2009 and the fifth round required by the Dodd-Frank Act. The 34 bank holding companies tested – generally those with $50bn or more in total consolidated assets – represent more than 75 per cent of the assets of all domestic bank holding companies. The Federal Reserve uses its own independent projections of losses and incomes for each firm.

In addition to releasing results under the severely adverse hypothetical scenario, the Board on also released results from the "adverse" scenario, which features a moderate recession in the US. In this scenario, the aggregate common equity capital ratio of the 34 firms fell from an actual 12.5 per cent in the fourth quarter of 2016 to a minimum level of 10.7 per cent.

The Dodd-Frank Act stress tests are one component of the Federal Reserve's analysis during the Comprehensive Capital Analysis and Review (CCAR), which is an annual exercise to evaluate the capital planning processes and capital adequacy of large bank holding companies. CCAR results will be released on 28th June.