All 31 banks participating in the Federal Reserve’s annual stress tests US unemployment rose 10%, home prices fell 36%, and commercial real estate prices plummeted 40%.The central bank made the announcement on Wednesday.
The bank as a whole This year’s “extremely unfavorable” scenario would see losses of nearly $685 billion, up from the $541 billion projected in the 2023 test.
Overall, capital levels fell by an average of 2.8 percentage points, the largest percentage decline since 2018, when they fell 3.6 percentage points. (By comparison, last year’s decline was 2.5 percentage points.)
Even under challenging conditions, all banks tested maintained above the 4.5% minimum capital buffer required by the test, although some banks performed better than others. For example, Charles Schwab maintained a capital ratio of 25.2% even under this severe scenario. TD, Deutsche Bank, JPMorgan Chase, BNY, State Street, Northern Trust, Morgan Stanley, Santander and UBS also maintained capital buffers above 10%.
BMO was closest to the bottom at 5%, followed by Citizens and HSBC at 6.5% and 6.7%, respectively.
Under the extremely adverse scenario, the banks that would see the sharpest declines in Common Equity Tier 1 capital would be Deutsche Bank, whose buffer would fall by a (hypothetical) 13.3 percentage points, and Swiss Bank, whose buffer would fall by 9.3 percentage points.
Is it an overestimation?
Still, at least one bank, JPMorgan Chase, said Wednesday night that the Fed had overstated the bank’s “other comprehensive income.” It counts revenues, expenses, and losses that are excluded from net income.
“If our analysis is correct, the resulting stress losses will be slightly higher.” the bank said in a statement.
In other words, JP Morgan The Fed is expected to finalize plans for dividend payments and share buybacks, a person familiar with the matter told CNBC, and expects banks to wait until after markets close on Friday to make their plans public.
JPMorgan would not be the first bank to disagree with the Fed over stress test calculations. The Fed last year projected that Bank of America would post $22.3 billion in other comprehensive income in the nine quarters covered by its adverse scenario, compared with $12.5 billion it projected.
Meanwhile, Citi’s internal stress tests last year projected noninterest income of $64.4 billion over the nine quarters, compared with the Fed’s forecast of $43.9 billion. According to Citi’s calculations, the bankof The capital adequacy ratio was 10.6%, higher than the Fed’s estimate of 9.1%.
“While banks are well-positioned to withstand the specific hypothetical recession we tested, our stress tests also identified areas that require attention,” Michael Barr, the Fed’s vice chairman for supervision, said in a statement Wednesday. “The financial system and its risks are constantly changing, and we learned during the Great Recession the costs of failing to recognize changing risks.”
Barr attributed the increase in hypothetical losses this year to rising credit card balances and delinquencies, increased risk in the corporate credit portfolio, and lower net income due to higher costs and lower fee income. The combination “has contributed to the increase in our net income.[s] The required capital buffer should be much larger,” Barr said.
quick response
The stress test prompted swift reactions from the Financial Services Forum, the American Bankers Association and others.
Results »“We remain categorical that the additional capital requirements in the Basel III endgame proposals are not justified,” FSF CEO Kevin Frommer said in a statement on Wednesday.
“The continued strength and resilience of the banking sector is further evidence that the recent wave of new regulation, including proposed increases to capital standards, is unjustified,” ABA CEO Rob Nichols said in a statement.
Federal Reserve officials The stress test results will not change the central bank’s plans to review capital requirements for major U.S. banks, according to the New York Times.
Hedge funds, credit cards, CRE
Wednesday’s stress test posed further challenges for the eight major banks that participated. The Federal Reserve predicted that if the five largest hedge funds failed, the eight banks could suffer losses of between $70 billion and $85 billion.
On the other hand, late credit card payments Tests showed that across a larger set of 31 banks, theoretical losses could reach $175 billion.
Ally had the highest credit card losses of any bank surveyed, at 40%, compared to 25.4% for Goldman Sachs, 23.2% for Capital One and 20.3% for Discover.
The Fed concluded that the banks subject to the tests would suffer losses of $142 billion in commercial and industrial loans, bringing the total commercial and industrial loan losses under the tests to $77 billion. Among the banks surveyed, Goldman Sachs recorded the largest CRE losses at 15.9%, followed by Royal Bank at 15.8%, Capital One at 14.6% and Northern Trust at 13%.
“We were expecting slightly larger losses compared to past years, particularly in areas such as commercial real estate, so we are pleasantly surprised by the results,” Chris Marinak, head of research at Janney Montgomery Scott, said in a note seen by Reuters.
“In many ways, banks should feel comfortable that they can weather a very nasty storm,” he added. “This doesn’t mean the Fed thinks commercial real estate is out of the woods. It’s still early in the credit cycle.”
Matthew Bisanz, a partner in the financial services practice at law firm Mayer Brown, said the stress tests were “unrealistic” because they relied on capital buffers.
“All 31 of these banks survived a stress event lasting nine quarters,” Visants told the Financial Times.[But] Last March, three banks were vandalized in one month.”
