All Banks Pass Stress Test But Vulnerabilities Remain

All 31 of the largest US banks passed the Federal Reserve’s annual stress test, but they experienced projected higher losses compared to last year.

The test demonstrated that the largest banks operating in the US could endure a severe recession scenario while still being able to lend to consumers and corporations.

Even though banks would lose nearly $685 billion and suffer their biggest hit in capital in six years, they would still have considerably more capital than their minimum required levels.

The stress test provided a hypothetical scenario where unemployment levels rose to 10%, commercial real estate values decreased by 40% and housing prices fell by 36%.

While no bank failed the test, aggregate capital levels declined by $144 billion compared to last year. This represented a fall of 2.8 percentage points, which was worse than last year’s decline of 2.5 percentage points but remains within the range of declines in previous years.

Michael Barr, vice chair for the Federal Reserve, said:  “While banks are well positioned to withstand the specific hypothetical recession we tested them against, the stress test also confirmed that there are some areas to watch.”

According to the Fed, the decline can be attributed to banks’ increased credit card balances and higher delinquency rates, which has resulted in greater projected credit card losses.

Banks’ corporate credit portfolios have become riskier and lead to higher projected corporate losses, which also contributed to this year’s decline, the Fed said.

This year’s stress test included banks such as JPMorgan Chase and Goldman Sachs, credit card companies including American Express and regional lenders such as Truist.

Since the 2008 financial crisis, the Fed has conducted this test to monitor and identify potential weaknesses in the US financial system.

It also determines the amount of capital banks must hold to be deemed healthy and how much they can return to shareholders.