On Wednesday, the Federal Reserve announced the results of its annual stress test, stating that the largest US banks are still resilient to a severe economic and financial crisis. Despite larger losses in this year’s test, Vice Chairman of Banking Supervision Michael Barr emphasized that all banks have ample capital and sufficient buffers to weather major economic downturns.
The Fed used a range of crisis scenarios for the stress test, including a rise in unemployment of more than 6 percentage points and a 40 percent decrease in commercial real estate prices. The test also evaluated the impact of shocks to international financial markets on banks with large trading arms. A total of 31 banks were tested this year, up from 24 last year, as smaller banks with balance sheets between 100 billion and 250 billion dollars were included.
Barr highlighted that while the losses for lenders in this year’s test were greater than last year due to riskier balance sheets and higher costs, all banks maintained sufficient capital levels. Higher risks were mainly associated with customers with credit cards and business loans, along with reduced profits from commissions. The CET1 capital ratio, an essential indicator for banks, was tested at 9.9 percent this year compared to 12.7 percent last year. The annual stress test was introduced after the financial crisis of 2007-2009 to restore confidence in the banking sector by regularly assessing their strength and buffers.
