Banking and Finance Law Daily Fed releases 2019 stress test results; finds capital sufficient to survive losses
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Monday, June 24, 2019

Fed releases 2019 stress test results; finds capital sufficient to survive losses

By Colleen M. Svelnis, J.D.

In the first year of supervisory stress testing excluding banks with less than $100 billion in assets, the Fed finds that the 18 firms tested would stay above their minimum requirements in hypothetical scenarios.

According to the Federal Reserve Board, results of supervisory stress testing, reported in Dodd-Frank Act Stress Test 2019: Supervisory Stress Test Results, show strong capital levels that would allow the nation’s largest banks to stay well above their minimum requirements after being tested against a severe hypothetical recession. Fed Vice Chairman Randal K. Quarles stated that the results "confirm that our financial system remains resilient." According to Quarles, "The nation's largest banks are significantly stronger than before the crisis and would be well-positioned to support the economy even after a severe shock." The Fed tested 18 firms this year, which represent about 70 percent of the assets of all banks operating in the United States.

Under the Dodd-Frank Act, the Fed is required to conduct annual stress testing of certain bank holding companies, U.S. intermediate holding companies, and other nonbank financial companies. The stress tests are one component of the Fed’s analysis during the Comprehensive Capital Analysis and Review (CCAR), an annual exercise to evaluate the capital planning processes and capital adequacy of large BHCs. Pursuant to the Economic Growth, Regulatory Relief, and Consumer Protection Act, this is the first year that smaller and less complex banks, those with less than $100 billion in total consolidated assets, were not tested, being on a two-year testing cycle. The Fed cautioned that because fewer firms participated in the 2019 stress test cycle, the aggregate results this year are not fully comparable to results from prior years.

Scenario results. The testing included three supervisory scenarios: baseline, adverse, and severely adverse. The results show that the 18 firms would experience substantial losses under both the adverse and severely adverse scenarios but could continue lending to businesses and households, due to the substantial build of capital since the financial crisis.

The most severe hypothetical scenario projects $410 billion in total losses for the 18 participating bank holding companies. This scenario featured a global recession with the U.S. unemployment rate rising by more than 6 percentage points to 10 percent, accompanied by a large decline in real estate prices and elevated stress in corporate loan markets. In this severely adverse scenario, the aggregate common equity tier 1 capital ratio would fall from an actual 12.3 percent in the fourth quarter of 2018 to its minimum of 9.2 percent, before rising to 9.7 percent at the end of nine quarters. The stress testing cycle begins in the first quarter of 2019 and ends in the first quarter of 2021. The Fed called the aggregate losses at the 18 firms comparable to those from the past few years, representing a slight decline from $464 billion for the same 18 firms in 2018. Credit card loans showed the highest losses, followed by commercial and industrial loans.

ABA response. In a statement responding to the release, American Bankers Association president and CEO Rob Nichols said the results "confirm the health and strength of the U.S. banking system, and they demonstrate that the nation’s largest banks could weather a severe global recession and still serve their customers and communities. This year’s test was one of the toughest since the Federal Reserve began stress testing in 2009, and included a jump in the unemployment rate to 10 percent. Even under this extreme and unlikely scenario, the results show banks would still hold more than enough capital to continue to fund the economy."

According to Nichols, the ABA believes that stress testing "can be further enhanced by completing the stress capital buffer, which will simplify the large bank capital rules while preserving strong capital levels."

Companies: American Bankers Association

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