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June 22, 2017

FED released results of the supervisory bank stress tests for 2017, under the Dodd-Frank Act. The results reveal that the nation's largest bank holding companies have strong capital levels and retain their ability to lend to households and businesses during a severe recession. Results of the Comprehensive Capital Analysis and Review (CCAR) will be released on June 28, 2017.

The most severe hypothetical scenario projects USD383 billion in loan losses at the 34 participating bank holding companies during the nine quarters tested. The "severely adverse" scenario features a severe global recession with the U.S. unemployment rate rising by approximately 5.25 percentage points to 10%, accompanied by heightened stress in corporate loan markets and commercial real estate. The firms' aggregate common equity tier 1 capital ratio, which compares high-quality capital to risk-weighted assets, would fall from an actual 12.5% in the fourth quarter of 2016 to a minimum level of 9.2% in the hypothetical stress scenario. Since 2009, the 34 firms have added more than USD 750 billion in common equity capital. In addition to releasing results under the severely adverse hypothetical scenario, the FED also released results from the "adverse" scenario, which features a moderate recession in the United States. In this scenario, the aggregate common equity capital ratio of the 34 firms fell from an actual 12.5% in the fourth quarter of 2016 to a minimum level of 10.7%.

This is the seventh round of stress tests led by the FED since 2009 and the fifth round required by the Dodd-Frank Act. The 34 bank holding companies tested—generally those with USD 50 billion or more in total consolidated assets—represent more than 75% of the assets of all domestic bank holding companies. The FED’s stress scenarios assume deliberately stringent and conservative hypothetical economic and financial market conditions. The results are not forecasts or expected outcomes. The FED uses its own independent projections of losses and incomes for each firm. The Dodd-Frank Act stress tests are one component of the FED's analysis during the CCAR, which is an annual exercise to evaluate the capital planning processes and capital adequacy of large bank holding companies.

Related Link: Results of 2017 Stress Tests (PDF)

Keywords: Americas, FED, US, Banking, CCAR, Stress Testing, Dodd-Frank Act

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