Fed Stress Test: Big Banks Can Absorb $708 Billion in Losses

America’s biggest banks could withstand more than $708 billion in losses during a severe global recession and still keep lending to households and businesses. That was the conclusion of the Federal Reserve’s annual stress test released Wednesday.

In the Fed’s hypothetical scenario, all 32 banks tested remained above their minimum capital requirements. The scenario assumed unemployment rising to 10%, commercial real estate prices falling 39%, and home prices dropping 30%.

The key capital measure, common equity tier 1 capital, which gauges a bank’s ability to absorb losses in a downturn, fell 1.6 percentage points in the exercise but still stayed well above the minimum required level. Projected losses included about $200 billion tied to credit cards, $160 billion from commercial and industrial loans, and $75 billion from commercial real estate.

Michelle Bowman, the Fed’s vice chair for supervision, said in a statement: “Today’s results underscore the resilience of the banking system.”

This year’s stress test comes at a pivotal moment for bank regulation. Unlike in previous years, the results will not affect the amount of capital large banks must hold. In February, the Fed said it would keep stress capital buffer requirements unchanged through 2027 while regulators redo the methodology, a move that could later change how much capital financial firms need to weather a potential downturn.

KBW analysts said in a June 21 research note that this year’s exercise might be little more than a formality for banks. They argued that banks are more likely to focus on the Basel III Endgame proposal expected later this year than on the stress test results themselves.

KBW estimated that if this year’s results were folded into capital requirements, Morgan Stanley, Citigroup, Citizens Financial and KeyCorp could see some of the biggest reductions in capital buffers.