Federal Reserve stress test shows: U.S. big banks can absorb $708 billion in losses

The Federal Reserve's annual stress test shows that, under a severe global recession scenario, major U.S. banks could absorb more than $708 billion in losses while continuing to lend to households and businesses.

In the scenario set by regulators, all 32 banks under review remained above their minimum capital requirements. The scenario included unemployment rising to 10%, commercial real estate prices falling 39%, and home prices dropping 30%.

One key capital measure used to gauge losses that can be absorbed through a downturn, the common equity tier 1 ratio, fell 1.6 percentage points in the test, but still remained well above the required minimum.

Projected losses in the test included about $200 billion tied to credit cards, $160 billion from commercial and industrial loans, and $75 billion from commercial real estate.

Michelle Bowman, the Fed's vice chair for supervision, said: "Today's results underscore the strength of the banking system."

This year's annual test comes at a pivotal moment for bank regulation. Unlike in previous years, the test results will not affect the amount of capital large banks are required to hold.

That is because in February the Federal Reserve said it would keep stress test buffers unchanged until 2027 while regulators redesign the framework and respond to industry concerns. The change could alter the amount of capital financial institutions are required to set aside for a future recession.

In a June 21 research note, KBW analysts described this year's stress test as "a formality" and expected the market to focus more on the Basel III Endgame proposal, due later this year, than on the stress test results themselves.

KBW estimated that if this year's results were incorporated into capital requirements, Morgan Stanley, Citigroup, Citizens Financial and KeyCorp could see some of the largest reductions in capital buffers.