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Financial Services Law Insights and Observations

Fed stress tests conclude largest banks can absorb economic shock

Federal Issues Stress Test Dodd-Frank Federal Reserve EGRRCPA

Federal Issues

On June 21, the Federal Reserve Board released the results of its supervisory Dodd-Frank Act bank stress tests conducted on 18 financial institutions, which collectively hold 70 percent of bank assets in the U.S. Under the most severe scenario tested by the Fed, consisting of a severe global recession— “with the U.S. unemployment rate rising by more than 6 percentage points to 10 percent, accompanied by a large decline in real estate prices and elevated stress in corporate loan markets”— the Fed projected losses at the 18 institutions would total $410 billion and the aggregate common equity tier 1 capital ratio would fall from an actual 12.3 percent in the fourth quarter of 2018 to 9.2 percent. Vice Chairman, Randal K. Quarles, noted that “[t]he results confirm that our financial system remains resilient,” and “the nation’s largest banks are significantly stronger before the crisis and would be well-positioned to support the economy after a secure shock.”

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