June 21, 2018

FED published the results of the 2018 supervisory stress tests for banks. The results show that the nation's largest bank holding companies are strongly capitalized and would be able to lend to households and businesses during a severe global recession. This year's exercise tested 35 participating bank holding companies during the nine quarters.

The most severe hypothetical scenario projects USD 578 billion in total losses by participating banks. The "severely adverse" scenario, the most stringent scenario yet used in the FED stress tests, features a severe global recession with the U.S. unemployment rate rising by almost 6 percentage points to 10%, accompanied by a steepening Treasury yield curve. The firms' aggregate common equity tier 1 capital ratio, which compares high-quality capital to risk-weighted assets, would fall from an actual level of 12.3% in the fourth quarter of 2017 to a minimum level of 7.9% in the hypothetical stress scenario. Since 2009, the 35 firms have added about USD 800 billion in common equity capital.

The FED stress scenarios assume deliberately stringent and conservative hypothetical economic and financial market conditions. The results are not forecasts or expected outcomes. This is the eighth round of stress tests led FED since 2009 and the sixth round required by the Dodd-Frank Act. The 35 firms tested this year represent about 80% of the assets of all banks operating in the U.S. FED uses its own independent projections of losses and incomes for each firm. The Dodd-Frank Act stress tests are one component of FED's analysis during the Comprehensive Capital Analysis and Review (CCAR), which is an annual exercise to evaluate the capital planning processes and capital adequacy of large bank holding companies. CCAR results will be released on Thursday, June 28.

Additionally, FED announced that to be consistent with the recently passed Economic Growth, Regulatory Reform, and Consumer Protection Act, bank holding companies with less than USD 100 billion in consolidated assets are no longer subject to supervisory stress testing, including both the Dodd-Frank Act stress tests and CCAR. Consequently, FED will not include CIT Group Inc., Comerica Incorporated, and Zions Bancorporation in this year's results and future cycles. FED will have further information on its implementation of the new law at a later date.

 

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Keywords: Americas, US, Banking, Stress Testing, DFAST, CCAR, FED

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