Federal Reserve Board releases results of annual bank stress test, which demonstrates that large banks are well positioned to weather a severe recession and continue to lend to households and businesses even during a severe recession

The Board of Governors of the Federal Reserve System (FED) has published the results of this year’s stress tests of large banks operating in the U.S (including subsidiaries of foreign banks). The test evaluated the resilience of in-scope institutions by assessing their capital levels, potential losses, revenue, and expenses under a hypothetical recession and financial market shock.
In detail, the stress tests 2023 included severely adverse scenarios to simulate a global economic recession and extremely negative financial market conditions, featuring a severe global downturn with substantial stress in commercial and private real estate prices of -40% and -38%, respectively, and a rising unemployment rate of up to 10%.
The stress test also included – for the first time ever – an exploratory market shock on the trading books of the largest banks, assessing their resilience, or better, their assets‘ resilience against inflationary pressures and rising interest rates.
Overall, the FED was quite satisfied with the results – despite the large increases in loan, counterparty, and trading losses – as the capital of participating institutions based upon such scenario was still way beyond the required levels. Specifically, all 23 banks that were tested remained above their minimum capital requirements during the simulated recession, despite projected total losses of $541 billion. The aggregate common equity risk-based capital ratio, which acts as a buffer against losses, declined by 2.3 percentage points to a minimum of 10.1% under stress.
To conclude, the Federal Reserve Board notes that the results of the annual bank stress test indicate that large banks are well-prepared to endure a severe recession and continue providing loans to households and businesses, despite substantial losses in the real estate sector.
The results, both in aggregate and by individual firms, may be viewed in the enclosed document or if you follow above noted link.