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.
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
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