Fed’s Bank Stress Tests: What does that mean?
Wednesday Federal Reserve says 23 biggest banks weathered severe recession scenario in stress test. The results confirm that the banking system remains strong and resilient. The rate of total loan losses varied considerably across the banks, from a low of 1.3% at Charles Schwab to 14.7% at Capital One; credit cards were easily the most problematic loan product.
👀What's the Fed's bank stress tests?
The Fed established the tests following the 2007-2009 financial crisis as a tool to ensure banks could withstand a similar shock in future. The tests formally began in 2011, and large lenders initially struggled to earn passing grades. The Fed changes the scenarios each year. They take months to devise and test a snapshot of banks' balance sheets at the end of the previous year. But it's still hard to prevent. In 2020, for example, the real economic crash caused by the COVID-19 pandemic was by many measures more severe than the Fed's scenario that year.
💡How are banks assessed now?
The test assesses whether banks would stay above the required 4.5% minimum capital ratio during the hypothetical downturn. Banks that perform strongly typically stay well above that. The nation's largest global banks also must hold an additional "G-SIB surcharge" of at least 1%.
How well a bank performs on the test also dictates the size of its "stress capital buffer," an additional layer of capital introduced in 2020 which sits on top of the 4.5% minimum. That extra cushion is determined by each bank's hypothetical losses. The larger the losses, the larger the buffer.
📖What were the results?
This year's stress test includes a severe global recession with a 40 percent decline in commercial real estate prices, a substantial increase in office vacancies, and a 38 percent decline in house prices. The unemployment rate rises by 6.4 percentage points to a peak of 10 percent and economic output declines commensurately.
The test's focus on commercial real estate shows that while large banks would experience heavy losses in the hypothetical scenario, they would still be able to continue lending. The banks in this year's test hold roughly 20 percent of the office and downtown commercial real estate loans held by banks. The large projected decline in commercial real estate prices, combined with the substantial increase in office vacancies, contributes to projected loss rates on office properties that are roughly triple the levels reached during the 2008 financial crisis.
The Federal Reserve Board on Wednesday released the results of its annual bank stress test, which demonstrates that large banks are well positioned to weather a severe recession and continue to lend to households and businesses even during a severe recession.
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sociable Sheep_7248 : End of the previous year? Oh yeah they are fine then
決然的凱特 : Prepare for interest rate cuts.
73167508 : I wish I could understand all of this. It's kinda hard to learn if someone is teaching me and explaining what is mean than I understand. lol. it's good to express my feelings
CboxInc : This is alot to take in
Brandthester : what a bunch of crap.
SpyderCall : Good article. Spred the good knowledge. not a lot of investors are even aware of a stress test
SpyderCall : This is one of the most important stress tests in a while, with the rocketing interests rates and the recent bank failures.