June 21, 2019

FED published a report presenting results of the Dodd-Frank Act Stress Test (DFAST) exercise for 2019. The results of this year’s stress test cycle show that all 18 banks subject to the supervisory stress test exceeded the required minimum capital and leverage ratios under the severely adverse stress scenario. However, in the aggregate, the 18 firms would experience substantial losses under both the adverse and severely adverse scenarios. Nevertheless, these firms could continue lending to businesses and households, due to the substantial build of capital since the financial crisis.

Only the largest and most complex banks were tested this year. As previously announced, smaller and less complex banks were not tested this year and are on a two-year cycle, consistent with the Economic Growth, Regulatory Relief, and Consumer Protection (EGRRCP) Act. The report on the 2019 DFAST results provides:

  • Details of the adverse and severely adverse supervisory scenarios used in DFAST 2019
  • An overview of the analytical framework and methods used to generate FED’s projected results, highlighting notable changes from last year’s program
  • Information about recent efforts to increase transparency
  • Additional details about FED’s assumptions in the supervisory stress test
  • Results of the supervisory stress test under adverse and severely adverse scenarios for the firms that participated in DFAST 2019, presented both for individual institutions and in aggregate

The results confirm that the largest and most complex banks have strong capital levels that would allow them to stay well above the minimum requirements, after being tested against the severe hypothetical recession. In the severely adverse scenario, losses are projected to be USD 410 billion. The aggregate common equity tier 1 capital ratio would fall from an actual 12.3% in the fourth quarter of 2018 to its minimum of 9.2%, before rising to 9.7% at the end of nine quarters. Loan losses in this year's stress test are broadly comparable to those from past years. Credit card loans showed the highest losses, followed by commercial and industrial loans. 

The DFAST cycle begins in the first quarter of 2019 and ends in the first quarter of 2021. The firms tested this year represent about 70% of the assets of all banks operating in the U.S. Results of the Comprehensive Capital Analysis and Review, or CCAR, will be released on June 27, 2019.

 

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Keywords: Americas, US, Banking, Stress Testing, Dodd-Frank Act, Stress Test Results, DFAST, CCAR, Basel III, EGRRCP Act, FED

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