All 23 banks scrutinized in the Federal Reserve's annual stress test have passed. The central bank says the outcome of Wednesday's stress test reaffirms the stability of the U.S. banking system amid ongoing economic concerns.
"Today's results confirm that the banking system remains strong and resilient," said Vice Chair for Supervision Michael Barr.
Barr emphasized, however, that the stress test is just one method to gauge the banks' strength and that vigilance regarding potential economic and market risks should persist.
The stress test, which employs a hypothetical recession and financial market shock scenario, is a mechanism put in place by the Fed to ensure that major banks are capable of supporting the economy during economic downturns.
Despite a projected $541 billion loss, all banks tested remained above their minimum capital requirements, with the common equity risk-based capital ratio expected to drop by 2.3% to a minimum of 10.1%.
The Scenarios: This year's test involved a severe global recession with a 40% decrease in commercial real estate prices, a significant rise in office vacancies, and a 38% drop in house prices. The unemployment rate was also projected to increase by 6.4%, reaching 10%.
The assumptions pointed to the potential for significant losses in the commercial real estate sector, contributing to projected loss rates on office properties that are approximately triple those during the 2008 financial crisis. However, the stress test shows that the banks would still continue to lend amid the hypothetical crisis.
The total projected losses of $541 billion include over $100 billion in losses from commercial real estate and residential mortgages and $120 billion in credit card losses, higher than the losses projected in last year's test.
Changes To The Test: The stress test scenarios are updated each year. The 2023 test was developed before the banking crisis this year, according to Reuters, which saw Silicon Valley Bank and two other lenders fail due to large unrealized losses on their U.S. Treasury bond holdings amid Fed interest rate hikes.
Despite criticism over the lack of a rising interest rate environment in the stress test, the 2023 test is considered tougher than previous years due to a healthier economic baseline.
Banks that participated in the test this year included some of the country's largest lenders like JPMorgan Chase & Co (NYSE: JPM), Bank of America Corp (NYSE: BAC), Goldman Sachs Group Inc (NYSE: GS), and Citigroup Inc (NYSE: C), among others.