WASHINGTON—The results of the Federal Reserve Board's annual bank stress test showed that while large banks would endure greater losses than last year's test, they are well positioned to weather a severe recession and stay above minimum capital requirements.
The new report from the Fed, however, is citing growing concerns with credit card delinquencies, an issue that has also been flagged by N.C.UA with credit unions.
"This year's stress test shows that large banks have sufficient capital to withstand a highly stressful scenario and meet their minimum capital ratios," Vice Chair for Supervision Michael S. Barr said in a statement. "While the severity of this year's stress test is similar to last year's, the test resulted in higher losses because bank balance sheets are somewhat riskier and expenses are higher. The goal of our test is to help to ensure that banks have enough capital to absorb losses in a highly stressful scenario. This test shows that they do."
Just One Tool
According to the Fed, its stress test is one tool to help ensure that large banks can support the economy during downturns. The test evaluates the resilience of large banks by estimating their capital levels, losses, revenue and expenses under a single hypothetical recession and financial market shock, using banks' data as of the end of last year.
“The individual results from the stress test inform a bank's capital requirements to help ensure a bank could survive a severe recession and financial market shock,” the Fed stated..
All Above Minimum Common Equity Tier
The Fed further reported that all 31 banks tested remained above their minimum common equity tier 1 (CET1) capital requirements during the hypothetical recession, after absorbing total projected hypothetical losses of nearly $685 billion. Under stress, the aggregate CET1 capital ratio—which provides a cushion against losses—is projected to decline by 2.8 percentage points, from 12.7 percent to 9.9 percent. While this is a greater decline than last year's, it is within the range of recent stress tests, the Fed added.
“This year's hypothetical scenario is broadly comparable to last year's scenario. It includes a severe global recession with a 40% decline in commercial real estate prices, a substantial increase in office vacancies, and a 36% decline in house prices. The unemployment rate rises nearly 6-1/2 percentage points to a peak of 10%, and economic output declines commensurately,” the Fed said.
Three Main Factors
With the scenario relatively unchanged from last year, the Fed said there are three main factors that explain the larger capital decline in this year's test:
- Substantial increases in banks' credit card balaN.C.es combined with higher delinquency rates have resulted in greater projected credit card losses
- Banks' corporate credit portfolios have become riskier, partly reflected in banks' downgrading of their own loans, resulting in higher projected corporate losses
- Higher expenses and lower fee income in recent years, resulting in less projected income to offset losses
The nearly $685 billion in total projected losses includes $175 billion in credit card losses, $142 billion in losses from commercial and industrial loans, and nearly $80 billion in losses from commercial real estate, the Fed reported.