Big Banks Easily Pass Federal Stress Tests

The nation’s largest and most complex banks easily passed the Federal Reserve’s annual stress tests, despite undergoing a scenario that simulated the most severe economic downturn yet tested.

The simulation projected $410 billion in total losses among the nation’s 18 largest banks when faced with the “severely adverse” scenario, which including unemployment rising to 10 percent, elevated stress in corporate loan markets, substantial declines in real estate prices, and recessions in the eurozone, the United Kingdom, and Japan. 

All 18 banks that underwent the simulation easily passed. In fact, banks have gradually improved their performances with stress tests. According to the Federal Reserve, “aggregate loan losses as a percent of average loan balances in the severely adverse scenario have declined since early stress test exercises, due in large part to improvements in firms’ portfolio quality.”

Credit card loans performed the worst in the simulation, followed by commercial and industrial loans. Nonetheless, “The results confirm that our financial system remains resilient,” said Vice Chairman Randal K. Quarles. “The nation’s largest banks are significantly stronger than before the crisis and would be well-positioned to support the economy even after a severe shock.”