Stress Test Reveals Large Banks Could Absorb $600B in Losses

Major US banks continue to have “strong capital levels” and could cope with a severe global recession, according to the Federal Reserve Board’s latest annual stress tests.

Each bank tested in the investigation showcased levels above the minimum capital requirements despite having a total projected loss of $612 billion.

The Fed’s report shows that large banks would have sufficient capital to absorb more than $600 billion in losses through a severe recession.

The positive and strong capital levels mean banks would be capable of financially supporting households and business via lending even during a severe recession, the Fed indicated.

The hypothetical scenario in the 2022 stress test included harsher economic conditions than previous stress tests, with a severe global recession and substantial stress within commercial real estate and corporate debt markets.

The 2022 stress test also included a sharp decline in asset prices, featuring “a nearly 40% decline in commercial real estate prices and a 55% decline in stock prices”.

The results recorded more than $450 billion in loan losses in addition to $100 billion in both trading and counterparty losses. A further $50 billion in losses was observed in large banks in comparison to 2021’s edition.

The Federal Reserve Board also stated that the aggregate 2.7% decline in capital was “slightly larger” than last year’s 2.4% decline.

Santander USA was ranked in the top quartile among participating banks, and said in a statement that the results demonstrated its “resiliency and the strength of its business model and capital position”.

PNC Financial Services also participated in the stress test. William Demchak, chairman, president and CEO of PNC Financial Services, said: “The results of the stress test demonstrate that PNC is well-positioned with a strong balance sheet to meet the needs of our customers, communities and employees during the hypothetical challenges of a severe economic downturn.”

The results of the stress test “factor directly into a bank’s capital requirements”, the Fed said, meaning the results determine how much capital each bank needs to hold in order to survive a “severe recession”.

Failure to do so would lead to “automatic restrictions on capital distributions and discretionary bonus payments”.