Fed Stress Tests: Large Banks Have Enough Capital To Lend During ‘Severe’ Recession

If a severe recession happens, the Federal Reserve‘s new annual stress tests shows large banks could continue lending to both households and businesses, a press release says.

There were 23 large banks surveyed, and the report finds that all of them are positioned to keep above their minimum capital requirements.

“Over the past year, the Federal Reserve has run three stress tests with several different hypothetical recessions, and all have confirmed that the banking system is strongly positioned to support the ongoing recovery,” said Vice Chair for Supervision Randal K. Quarles.

The restrictions of the pandemic will be done away with, the release says. Instead there will now be the normal restrictions on the stress capital buffer (SCB). That framework was set up last year and keeps in place strong capital requirements in the aggregate for bigger banks. The stress tests are a big part of how that is determined.

If banks don’t stay above their capital requirements, there will be restrictions passed down on capital distributions and discretionary bonus payments.

With the stress tests, the banks are assessed on how they’d fare in terms of economic downturns, looking into how estimates go on losses, revenue and capital levels in terms of nine future quarters.

The hypothetical scenario this year involved a large global recession and substantial stress in the markets for commercial real estate and corporate debt. In the scenario the unemployment rate would rise 4 percentage points and asset prices would fall by 55 percent, the release says.

Earlier this year, a Wells Fargo analyst said U.S. banks would potentially cut around 200,000 jobs in the next 10 years. That’s because of the ways consumer banking behavior is changing in the wake of the pandemic, with jobs at branches and call centers likely to see the steepest falls. That has come about as companies like Amazon and PayPal edged their ways into banking services.