Banks Pass Federal Reserve’s Stress Test But Aren’t As Strong As Last Year

Large American banks remain well positioned to withstand a major recession, though they’re quite as strong as they were last year, the Federal Reserve’s annual bank stress test showed. 

“While the severity of this year’s stress test is similar to last year’s, the test resulted in higher losses because bank balance sheets are somewhat riskier and expenses are higher,” said Vice Chair for Supervision Michael S. Barr in a statement.

All of the 31 banks tested in the annual simulation of an economic recession met their capital requirements, despite absorbing hypothetical losses of nearly $685 billion, the Federal Reserve said. The hypothetical scenario in the stress test included a 40% drop in commercial real estate prices, a 36% decline in home prices and a 6.5% jump in the unemployment rate. 

Regulatory reforms enacted following the 2008 financial crisis required the Federal Reserve to conduct periodic stress tests on banks to determine if they could survive in the event of a downturn. 

The Federal Reserve said it believed there was more weakness because of a few factors. Higher bank credit card balances this year would create greater credit card losses, while corporate credit portfolios also became riskier, the report said. Additionally, higher expenses and lower revenue from fees would give banks fewer opportunities to offset losses. 

“The stress test helps us better understand how these risks are evolving on bank balance sheets and, importantly, whether banks are sufficiently capitalized to withstand them during stress,” Barr said.