U.S. banks can withstand $708B in losses

The biggest U.S. banks would be able to absorb more than $708 billion in losses in a severe global recession while continuing to lend to households and businesses, according to the Federal Reserve’s annual stress test released Wednesday.

All 32 banks examined by the Fed remained above their minimum capital requirements under the regulator’s hypothetical scenario, which included unemployment surging to 10%, a 39% drop in commercial real estate prices and a 30% decline in home prices.

The industry’s common equity tier 1 capital ratio, a key capital measure that would absorb losses in a downturn, fell by 1.6 percentage points during the exercise, remaining comfortably above required minimums. Projected losses for the group included roughly $200 billion tied to credit cards, $160 billion from commercial and industrial loans and $75 billion from commercial real estate.

“Today’s results underscore the strength of the banking system,” Federal Reserve Vice Chair for Supervision Michelle Bowman said in a release.

The annual exercise comes at a pivotal moment for bank regulation because, unlike in previous years, the results will not affect the amount of capital large banks are required to hold.

That’s because the Fed said in February that it would leave the stress test buffers untouched until 2027 as regulators rework the methodology, heeding industry complaints, a move that could eventually reshape how much capital firms must hold against future downturns.

In a June 21 research note that described this year’s exercise as “going through the motions,” KBW analysts led by Christopher McGratty said banks are likely to remain focused on the pending Basel III Endgame proposal expected later this year rather than the stress test results themselves.

KBW estimated that if this year’s results had counted toward capital requirements, Morgan Stanley, Citigroup, Citizens Financial and KeyCorp would have seen some of the largest reductions in capital buffers.