35 Banks Pass Federal Reserve Supervisory Bank Stress Tests

According to the results of the latest round of supervisory stress tests undertaken by the Federal Reserve, 35 of the nation’s largest bank holding companies were found to have sufficient capital to lend to households and businesses in the event of a severe global recession.

In a press release announcing the results of the stress tests, the Federal Reserve found that the most severe hypothetical scenario projects $578 billion in total losses among the 35 banks that underwent examination. In this scenario, the U.S. employment rate would also rise by almost six percentage points to 10 percent.

Federal Reserve Vice Chairman Randal K. Quarles said, “Despite a tough scenario and other factors that affected this year’s latest test, the capital levels of the firms after the hypothetical severe global recession are higher than the actual capital levels of large banks in the years leading up to the most recent recession.”

Contributing to the higher post-stress capital ratios were higher credit card balances, which would produce increased losses in the event of a stress situation. Additionally, changes made as a result of last year’s tax reform legislation had varied effects. Some firms saw declines in their starting capital ratios “because of certain accounting consequences of the tax changes,” though these declines are expected to be one-time events. Additionally, the tax reform effort eliminated some beneficial tax treatments that raised post-tax income in stress events.

The 35 banks that were tested represent approximately 80 percent of the assets of all U.S. banks, and this round of tests represents the eighth led by the Federal Reserve since 2009.