FED Issues Report on Results of 2021 Stress Tests for Banks
FED published the results of the stress tests for banks for 2021. The aggregate results of Dodd-Frank Act Stress Test (DFAST) 2021 suggest the 23 firms that participated in the supervisory stress test would experience substantial losses under the severely adverse scenario; however, these firms would remain well above the minimum risk-based requirements and could continue lending to businesses and households. Thus, all additional, temporary capital distribution restrictions imposed following the outbreak of COVID-19 will expire on June 30, 201. FED also corrected error with the results for BNP Paribas USA from the June and December 2020 stress tests, making corrections to the projected pre-provision net revenue, projected pre-tax net income, and projected capital ratios.
The report provides details of the supervisory severely adverse scenario used in DFAST 2021 and an overview of the analytical framework and methods used to generate the projected results, highlighting several changes for DFAST 2021. It also presents the results of the supervisory stress test under the severely adverse scenario for the firms that participated in DFAST 2021, presented both in the aggregate and for individual firms. This year's hypothetical scenario included a severe global recession with substantial stress in the commercial real estate and corporate debt markets. Gross domestic product falls 4% from the fourth quarter of 2020 through the third quarter of 2022 while asset prices decline sharply, with a 55% decline in equity prices. Under the hypothetical scenario, the 23 large banks would collectively lose more than USD 470 billion, with nearly USD 160 billion losses from commercial real estate and corporate loans. However, their capital ratios would decline to 10.6%, from an actual 13.0% in the fourth quarter of 2020, before rising to 11.2% at the end of the first quarter of 2023, still more than double their minimum requirements.
he aggregate common equity tier 1 (CET1) ratio remains well above the required minimum levels throughout the projection horizon. The larger decline in aggregate CET1 capital ratios compared with DFAST 2020 is due in part to lower projected pre-provision net revenue resulting from a flatter yield curve and a larger share of low-yielding assets on bank balance sheets. Aggregate losses under the DFAST 2021 severely adverse scenario are projected to be USD 474 billion, of which USD 353 billion are projected loan losses. Both aggregate and loan losses are little changed from DFAST 2020. FED notes that large firms will remain subject to the normal restrictions imposed by the regulatory capital framework of FED, inclusive of the stress capital buffer (SCB). The firms participating in DFAST 2021 will be subject to the SCB requirements based on the DFAST 2021 results beginning October 01, 2021.
Related Links
Keywords: Americas, US, Banking, Stress Testing, DFAST, Dodd-Frank Act, COVID-19, Severely Adverse Scenario, Commercial Real Estate, Stress Capital Buffer, Regulatory Capital, Basel, FED
Featured Experts
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
James Partridge
Credit analytics expert helping clients understand, develop, and implement credit models for origination, monitoring, and regulatory reporting.
Previous Article
European Authorities Issue Statement on LIBOR CessationRelated Articles
OSFI Discusses Benchmark Rate Transition, Sets Out Work Priorities
The Office of the Superintendent of Financial Institutions (OSFI) published the strategic plan for 2022-2025 and the departmental plan for 2022-23.
EBA Proposes Standards to Support Secondary NPL Markets
The European Banking Authority (EBA) is consulting, until August 31, 2022, on the draft implementing technical standards specifying requirements for the information that sellers of non-performing loans (NPLs) shall provide to prospective buyers.
EU Confirms Agreement on Rules on Cybersecurity and Banking Resolution
The European Council and the Parliament reached an agreement on the revised Directive on security of network and information systems (NIS2 Directive).
EBA Issues Standards for Crowdfunding Service Providers Under ECSPR
The European Banking Authority (EBA) published the final draft regulatory technical standards specifying information that crowdfunding service providers shall provide to investors on the calculation of credit scores and prices of crowdfunding offers.
EU Confirms Agreement on Rules on Cybersecurity and Banking Resolution
The European Securities and Markets Authority (ESMA) published a paper that examines the systemic risk posed by increasing use of cloud services, along with the potential policy options to mitigate this risk.
EC Consults on PSD2 and Open Finance; EU Reaches Agreement on DORA
The European Commission (EC) published a public consultation on the review of revised payment services directive (PSD2) and open finance.
EC Mandates ESAs to Propose Amendments to SFDR Technical Standards
The European Commission (EC) has issued two letters mandating the European Supervisory Authorities (ESAs) to jointly propose amendments to the regulatory technical standards under Sustainable Finance Disclosure Regulation or SFDR.
EBA Examines Supervisory Practices, Issues Deposits Reporting Template
The European Banking Authority (EBA) published its annual report on convergence of supervisory practices for 2021. Additionally, following a request from the European Commission (EC),
SNB Updates NSFR Forms and FINMA Consults on Operational Risk Circular
The Swiss National Bank (SNB) published Version 1.2 of the reporting forms (NSFR_G and NSFR_P) on the net stable funding ratio (NSFR) of banks, along with the associated documentation.
US Agency Publications Address Basel, Reporting, and CECL Developments
The Farm Credit Administration published, in the Federal Register, the final rule on implementation of the Current Expected Credit Losses (CECL) methodology for allowances
