Editor’s note: This story incorrectly included stock information for Citizens Inc. instead of Citizens Financial Group Inc, which is the company named in the Federal Reserve’s stress test report and has been corrected.
The Federal Reserve Bank’s annual stress test on Wednesday found that while big banks face larger projected losses than last year in a downturn scenario, they remain well-positioned to weather a severe recession and maintain their capital requirements above the minimum limits.
“This year’s stress test shows that large banks have enough capital to withstand a very stressful scenario and meet their minimum capital ratios,” the Fed’s vice chairman for supervision said. Michael S. Barr.
Although this year’s negative stress test scenario is as severe as last year’s, it resulted in larger losses due to slightly riskier bank balances and increased spending, he said.
Reflecting on the regional banking crisis of 2023, Barr emphasized that important lessons have been learned.
The Fed stated that “large banks are generally well positioned to withstand a sudden funding shock in the form of deposit drift.” Moreover, net bank interest income remains resilient in a high-rate environment, even when factoring in funding shock assumptions.
Bank stress test 2024 details, results
This year’s test showed that all 31 banks remained above their minimum Common Equity Tier 1 (CET1) capital requirements despite projected total hypothetical losses of close to $685 billion.
The hypothetical scenario for this year’s test reflects the severe test of last year’s global recession, including a 40% drop in commercial real estate prices, a significant increase in office vacancies and a 36% decline of housing prices. The unemployment rate peaks at 10% in the stress test, with a corresponding drop in economic output.
Under the stress scenario, the aggregate CET1 capital ratio is expected to decline by 2.8 percentage points, from 12.7% to 9.9%. Although this is a larger drop than last year’s test, it remains within the range of recent tests.
Three main factors contribute to the steepest drop in equity in this year’s test:
- Increasing credit card losses: A significant increase in credit card balances and higher delinquency rates lead to higher projected credit card losses. The banks most exposed to credit card losses were Ally Financial Inc. ally, Discover Financial Services DFS AND Goldman Sachs GS.
- Riskiest corporate loan portfolios: Banks have reduced their corporate lending, reflecting increased risk and resulting in higher projected corporate losses. The banks that will face the biggest impact on their corporate loan balances are Discover Financial Services, Barclays plc BCS AND Citizens Financial Group Inc CFG.
- Higher expenses and lower income from fees: Reduced projected revenue from higher spending and lower fee revenue exacerbates the decline in capital.
Projected losses include $175 billion in credit card losses, $142 billion in commercial and industrial loans and $77 billion in commercial real estate.
“Banks’ large exposure to commercial real estate (CRE) debt remains an area of focus for Federal Reserve supervisors,” the report said.
The adverse 2024 supervisory scenario includes increased stress on commercial real estate (CRE), with a 40% drop in CRE prices.
Although expected losses on loans to office properties have increased due to the deterioration of fundamentals in the office segment, the Fed said that these losses are balanced by a decrease in expected losses on loans to hotels and retail properties, as market fundamentals for these sectors have improved over the past year.
Market reactions: Capital One Financial Corp croakCitizens Financial Group and Goldman Sachs were among the worst performers Select Financial Sector SPDR Fund XLF components in aftermarket trading as of 5:05 PM ET. The best performer was Truist Financial Corp. TFCup 1.7%
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