Fed Stress Test Confirms Large US Banks Can Withstand Severe Recession

The Federal Reserve's Comprehensive Capital Analysis and Review (CCAR) results have confirmed that large US banks are well-positioned to weather a severe recession. The stress test, which involved severely adverse operating scenarios, included rising unemployment from 4.5 percent to 10 percent, a 4.6 percent decline in real GDP, and a 58 percent loss in equity prices.

The Fed subjected 32 large US banks to this scenario and found that they would absorb almost $708 billion in losses. The aggregate Common Equity Tier 1 (CET1) capital ratio of these banks fell by only 1.6 percentage points, from 12.8 percent to a low of 11.2 percent, before recovering to 12.7 percent by the end of the projected nine-quarter exercise.

The results indicate that every bank assessed remained above the 4.5-percent minimum CET1 ratio throughout the hypothetical downturn, preserving their capital and enabling them to continue recognizing bad debts without becoming insolvent or cutting lending.