The Federal Reserve Board’s annual bank stress test results indicate that large banks are well-prepared to handle a severe recession while maintaining their capital requirements and continuing to lend. The test shows a 1.8 percentage point decline in the common equity tier 1 (CET1) capital ratio, which acts as a buffer against losses.
In April, the Board proposed averaging stress test results over two years to mitigate volatility when calculating capital requirements. If implemented, this would mean combining this year’s results with those from 2024, resulting in an aggregate capital decline of 2.3 percentage points.
This year’s decrease is smaller than in previous years, partly due to unintended volatility in the stress test models. The Board plans to address these issues by seeking public feedback on its models and scenario design later this year.
“Large banks remain well capitalized and resilient to a range of severe outcomes,” said Vice Chair for Supervision Michelle W. Bowman. She noted that finalizing the proposal to average two consecutive years of stress test results could help manage excessive volatility.
All 22 banks tested stayed above their minimum CET1 capital requirements during the stress scenario, despite projected hypothetical losses exceeding $550 billion.
The current stress scenario is less severe than last year’s due to its countercyclical nature, featuring a severe global recession with significant declines in real estate prices and rising unemployment.
Key factors influencing this year’s test include over $550 billion in total projected losses: nearly $158 billion from credit card losses, $124 billion from commercial and industrial loans, and $52 billion from commercial real estate losses.
Additionally, corrected 2024 stress test results were released due to minor errors in loss projections for corporate and first-lien mortgage loans; however, these did not affect the overall post-stress capital decline for that year.
