The results of the Dodd-Frank Act Stress Tests (DFAST) conducted by the Federal Reserve on the nation’s 33 largest bank holding companies showed improved capital levels and credit quality, which strengthened their ability to lend during times of severe economic stress, according to the Fed on Thursday afternoon.
The 33 bank holding companies tested hold more than 80 percent of domestic banking assets. The hypothetical severe economic scenario for which the banks were tested would result in about $385 billion in losses for the 33 firms tested. That scenario would include a severe global recession with an increase of five percentage points for the U.S. unemployment rate followed by a heightened period of financial stress. The scenario would also include negative yields for short-term U.S. Treasury securities, according to the Fed.
“The changes we make in each year's stress scenarios allow supervisors, investors, and the public to assess the resiliency of the banking firms in different adverse economic circumstances,” Governor Daniel K. Tarullo said. “This feature is key to a sound stress testing regime, since the nature of possible future stress episodes is inherently uncertain.”
Under the severely adverse economic scenario, the aggregate common equity tier 1 ratio, which compares high-quality capital to risk-weighted assets, for the 33 firms tested would fall from an actual 12.3 percent in Q4 2015 down to a minimum level of 8.4 percent.
According to the Fed, the 33 firms have added a combined total of more than $700 billion in common equity capital.
The Fed also tested the 33 bank holding companies for the ability to lend in an “adverse” scenario featuring a moderate recession, as opposed to a severe one. In the hypothetical adverse scenario, aggregate common equity capital ratio for the 33 companies would drop from an actual 12.3 percent in Q4 2015 down to a minimum level of 10.5 percent, according to the Fed.
DFAST is one component of the Fed’s Comprehensive Capital Analysis and Review (CCAR), an annual test to evaluate the largest bank holding companies’ capital planning process and capital adequacy. The result of the CCAR will be released on Wednesday, June 29.
Click here to view the complete supervisory stress test results released Thursday.