All 34 banks in Federal Reserve's stress test would weather severe recession

Jun. 23, 2022 4:35 PM ETMorgan Stanley (MS), WFC, JPM, GS, C, BACSCHW, AXP, HSBC, COF, FITB, UBS, USB, BK, BMO, TD, RY, MTB, RF, KEY, STT, NTRS, PNC, HBAN, DB, CS, BCS, SAN, TFC, DFS, BNPQY, ALLY, CFG, MUFG, BMO:CA, TD:CA, RY:CABy: Liz Kiesche, SA News Editor47 Comments

Seal of the Federal Reserve System, currency concept.

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All 34 banks passed the Federal Reserve's stress test, indicating that they would have enough capital to allow them to continue lending to households and businesses during a severe recession, the central bank said Thursday.

All bank test results remained above the minimum capital requirements despite total projected losses of $612B.

Under stress, the aggregate common equity capital ratio — which provides a cushion against losses — is projected to decline by 2.7 percentage points to a minimum of 9.7 percent, which is still more than double the minimum requirement.

As a result, big banks such as JPMorgan Chase (NYSE:JPM), Goldman Sachs (NYSE:GS), American Express (AXP), Charles Schwab (SCHW), Bank of America (NYSE:BAC), and U.S. Bancorp (USB) can use their excess capital to buy back stock or distribute dividends. The banks, though, must wait until after the close Monday to disclose those plans.

2022's hypothetical scenario included a severe global recession with substantial stress in commercial real estate and corporate debt markets. The unemployment rate rises by 5-3/4 percentage points to a peak of 10% and GDP declines commensurately. Asset prices decline sharply, with a nearly 40% decline in commercial real estate prices and a 55% decline in stock prices.

Total losses were largely driven by more than $450B in loan losses and $100B in trading and counterparty. Larger banks saw an increase of over $500B in losses compared with the 2021 test. The aggregate 2.7% decline in capital is slightly larger than the 2.4% decline from last year's test but is comparable to recent years.

To pass the test, the banks must each have a minimum CET1 of 4.5%. The stress capital buffer requirement, which is determined by the stress test, is at least 2.5% and if applicable a capital surcharge for global systemically important banks of at least 1.0%.

Relevant tickers include: Bank of America (BAC), Citigroup (NYSE:C), Goldman Sachs (GS), JPMorgan Chase (JPM), Morgan Stanley, (NYSE:MS), Wells Fargo (NYSE:WFC), BNY Mellon (BK), American Express (AXP), State Street (STT), Charles Schwab (SCHW), Ally Financial (ALLY), Barclays (BCS), Bank of Montreal (BMO), BNP Paribas (OTCQX:BNPQY), Capital One (COF), Charles Schwab (SCHW), Citigroup (C), Citizens Financial (CFG), Credit Suisse (CS), Deutsche Bank (DB), Discover Financial (DFS), Fifth Third Bancorp (FITB), HSBC (HSBC), Huntington Bancorp (HBAN), KeyCorp (KEY), M&T Bank (MTB), Mitsubishi UFG (MUFG), Northern Trust (NTRS), PNC Financial (PNC), RBC (RY), Regions Financial (RF), Santander Holdings USA (SAN), TD Bank (TD), Truist Financial (TFC), UBS (UBS), U.S. Bancorp (USB)

Source: Federal Reserve.

Previously (Feb. 11) Bank stress tests will pose a bigger economic drop from higher starting point in '22

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