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The Federal Reserve's annual bank stress test showed that large American banks are well-positioned to weather a severe recession, while staying above minimum capital requirements and continuing to lend to households and businesses, a statement from the US central bank said. The stress test evaluates the resilience of large banks by estimating losses, net revenue, and capital levels -- which provide a cushion against losses -- under hypothetical recession scenarios.
The Federal Reserve's stress test assesses whether banks are sufficiently capitalized to absorb losses during stressful conditions while meeting obligations to creditors and counterparties and continuing to be able to lend to households and businesses. The Federal Reserve conducts the stress test annually, using a minimum of two different scenarios to test a bank's capital adequacy during times of stress, and publicly discloses bank-level results. Banks must also conduct and publicly disclose the results of their company-run stress tests based on their risk profiles. "Large banks remain well capitalised and resilient to a range of severe outcomes," Vice Chair for Supervision Michelle W. Bowman said. "One way to address the excessive volatility in the stress test results and corresponding capital requirements is for the Board to finalise the proposal that would average two consecutive years of stress test results, which was released in April," Bowman added. The Fed, in its statement, said all 22 banks tested remained above their minimum CET1 capital requirements during the stress scenario. According to the Fed, this year's stress scenario is less severe than last year's scenario due to the stress test's countercyclical design. It includes a severe global recession with a 30 per cent decline in commercial real estate prices and a 33 per cent decline in house prices. The unemployment rate rises nearly 5.9 percentage points to a peak of 10 per cent, and economic output declines commensurately. Also, the Board released corrected 2024 stress test results and capital requirements stemming from modest errors in the loss projections for corporate and first-lien mortgage loans. Fed said that these corrections did not change the aggregate post-stress capital decline in 2024. (ANI)
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