FRB Releases Results of Stress Tests on Large Bank Holding Companies

Federal Reserve

On March 12 and 13, the Federal Reserve Board (FRB) announced the methodology and results of stress tests it conducted on nineteen large U.S. bank holding companies as part of its 2012 Comprehensive Capital Analysis and Review (CCAR). Through the CCAR, the FRB is evaluating the capital planning processes and capital adequacy of the largest U.S. bank holding companies. One element of this evaluation is a supervisory stress test to evaluate whether firms would have sufficient capital to continue lending in a severely adverse economic environment. The CCAR stress test scenario assumes a severe recession in the U.S. with a peak unemployment rate of 13%, a 50% decrease in U.S. equity prices, and a 20% decline in U.S. house prices. The results, which are based on input from the holding companies, project (i) $534 billion of aggregate losses for the nineteen holding companies tested during the nine quarters of the scenario and (ii) that most of the holding companies will maintain regulatory capital ratios above regulatory minimum levels despite significant declines in capital ratios. The FRB emphasized that the results are not “expected or likely outcomes, but rather possible results under hypothetical, highly adverse conditions.” The FRB stated in its March 13 release that it would notify each bank holding company of any objections it has to the holding company’s current capital plan or planned capital distributions.