US largest bank holding companies are strongly capitalized and would be able to lend during severe global recession
OREANDA-NEWS. June 22, 2018. 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, according to the results of supervisory stress tests released Thursday by the Federal Reserve Board.
The most severe hypothetical scenario projects $578 billion in total losses for the 35 participating bank holding companies during the nine quarters tested. The "severely adverse" scenario, the most stringent scenario yet used in the Board's stress tests, features a severe global recession with the U.S. unemployment rate rising by almost 6 percentage points to 10 percent, 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 percent in the fourth quarter of 2017 to a minimum level of 7.9 percent in the hypothetical stress scenario. Since 2009, the 35 firms have added about $800 billion in common equity capital.
"Despite a tough scenario and other factors that affected this year's test, the capital levels of the firms after the hypothetical severe global recession are higher than the actual capital levels of large banks in the years leading up to the most recent recession," Vice Chairman Randal K. Quarles said.
Several factors affected the post-stress capital ratios this year. Credit card balances are generally higher, producing increased losses under stress, totaling $113 billion this year. Additionally, recent changes to the tax code affected the firms and the effects were different across the firms. Several firms had immediate, one-time declines in their starting capital ratios because of certain accounting consequences of the tax changes. The tax law also eliminated some beneficial tax treatments that tended to raise post-tax income in times of stress.
Capital is critical to banking organizations, the financial system, and the economy, because it acts as a cushion to absorb losses and helps to ensure that losses are borne by shareholders. The Board's 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 by the Federal Reserve since 2009 and the sixth round required by the Dodd-Frank Act. The 35 firms tested this year represent about 80 percent of the assets of all banks operating in the U.S. The Federal Reserve uses its own independent projections of losses and incomes for each firm.