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The Federal Reserve gave the biggest U.S. banks a clean bill of health in its annual stress test, saying they would be able to continue lending to households and businesses even in a severe recession, despite seeing total projected losses over half a trillion dollars.
All 23 banks tested remained above their minimum capital requirements during the hypothetical recession that includes a severe global recession with a 40% decline in commercial real estate prices and the unemployment rate rising to a peak of 10%, the central bank said in a report Wednesday.
“Today’s results confirm that the banking system remains strong and resilient,” Vice Chair for Supervision Michael Barr said in a statement, adding that policymakers should remain humble about how risks can arise and continue work to ensure that banks are resilient to a range of economic scenarios, market shocks, and other stresses.
Banks were preparing for the release of the Fed's stress test results, the first in a trio of regulatory actions that could result in higher capital requirements. The results are expected to be followed by announcements of Basel III Endgame requirements and new regulations in the wake of the collapse of four regional banks earlier this year.
The Fed changes the scenarios each year. The 2023 tests were devised before this year's banking crisis in which Silicon Valley Bank and two other lenders failed.
The test’s focus this year on commercial real estate shows that while large banks would experience heavy losses in the hypothetical scenario, they would still be able to continue lending, the Fed said, noting total projected losses amounting to USD541 billion. That is higher than the losses projected in last year’s test but the Fed said the 2.3% aggregate decline in capital is comparable to projections from stress tests in recent years.
In the severely adverse scenario, banks are projected to lose USD64.9 billion on CRE exposures, or 8.8% of average balances. Overall projected CRE loss rates have fallen since 2020 as the hospitality sector recovered from the acute pandemic-related stress, but they remain elevated.
Source: Federal Reserve
Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.