U.S.-based banks suffered losses in a hypothetical economic downturn under the Federal Reserve’s 2024 stress tests, but the banks managed to retain minimum capital requirements, and were “well positioned to weather a severe recession.”
“This year’s stress test shows that large banks have sufficient capital to withstand a highly stressful scenario and meet their minimum capital ratio,” said Vice Chair for Supervision Michael S. Barr.
“While the severity of this year’s stress test is similar to last year’s, the test resulted in higher losses because bank balance sheets are somewhat riskier and expenses are higher. The goal of our test is to help to ensure that banks have enough capital to absorb losses in a highly stressful scenario. This test shows that they do.”
The $685 billion in losses included $175 billion in credit card losses, $142 billion from commercial and industrial loans, and an almost $80 billion loss from commercial real estate.
“Instead of running stress tests in an open and accountable manner, subject to public scrutiny, the Federal Reserve cloaks the stress tests under a veil of secrecy. This is no legal basis for this secrecy, and the perceived benefits of secrecy are illusory at best,” he said.
Transparency in Stress Tests
The American Bankers Association (ABA), which represents banks accounting for around $19 trillion in deposits, welcomed the Fed’s stress-test results, claiming it shows the country’s banks remain “healthy, highly capitalized, and well prepared to weather a severe recession.”“The continued strength and resilience of the banking sector is further evidence that the recent tsunami of new regulation, including proposed higher capital standards, is unwarranted and would only hinder the ability of banks of all sizes to serve their customers, clients, and communities.”
The results of these tests are used to determine capital requirements for banks. If the performance of banks comes out as too uncertain, they could end up allocating capital in an excessively conservative manner. This limits the money lent out by banks to individuals and businesses, the BPI stated.
“Given its far-reaching economic implications, the stress-testing regime deserves public transparency through the notice and comment process, a legal requirement the Fed currently does not meet,” it said.
Francisco Covas, the head of research at BPI, took part in the House Financial Service Committee hearing on Wednesday. He called for allowing public comments on the scenarios and models used by the Fed in the tests.