Board of Governors of the Federal Reserve System

The largest U.S.-based bank holding companies continue to build their capital levels and to strengthen their ability to lend to households and businesses during a period marked by severe recession and financial market volatility, according to the results of supervisory stress tests announced by the Federal Reserve on Thursday.

The most severe hypothetical scenario projects that loan losses at the 31 participating bank holding companies would total $340 billion during the nine quarters tested. The "severely adverse" scenario features a deep recession with the unemployment rate peaking at 10 percent, a decline in home prices of 25 percent, a stock market drop of nearly 60 percent, and a notable rise in market volatility. The 31 firms' aggregate tier 1 common capital ratio, which compares high-quality capital to risk-weighted assets, would fall from an actual 11.9 percent in the third quarter of 2014 to a minimum level of 8.2 percent in the hypothetical stress scenario. This hypothetical post-stress minimum is significantly higher than the 31 firms' aggregate tier 1 common capital ratio of 5.5 percent measured in the beginning of 2009.

Capital is important to banking organizations, the financial system, and the economy because it acts as a cushion to absorb losses and helps to ensure that losses are borne by shareholders, not taxpayers. The Federal Reserve's stress scenario estimates are the outcome of deliberately stringent and conservative assessments under hypothetical economic and financial market conditions. The results are not forecasts or expected outcomes.

"Higher capital levels at large banks increase the resiliency of our financial system," Federal Reserve Governor Daniel K. Tarullo said. "Our supervisory stress tests are designed to ensure that these banks have enough capital that they could continue to lend to American businesses and households even in a severe economic downturn."

This is the fifth round of stress tests led by the Federal Reserve since 2009 and the third round required by the Dodd-Frank Act. The 31 firms tested represent more than 80 percent of domestic banking assets. The Federal Reserve uses its own independent projections of losses and incomes for each firm.

In addition to releasing results under the severely adverse hypothetical scenario, the Federal Reserve on Thursday also released results from the "adverse" scenario, which features a more moderate recession, but a rapid increase in short- and long-term interest rates. In this scenario, the aggregate tier 1 common capital ratio of all 31 firms would fall from an actual 11.9 percent in the third quarter of 2014 to the minimum level of 10.8 percent.

The quantitative results from the Dodd-Frank stress tests are one component of the Federal Reserve's analysis during the Comprehensive Capital Analysis and Review (CCAR), which is an annual exercise to evaluate the capital planning processes and capital adequacy of large financial institutions. CCAR results will be released on Wednesday, March 11, at 4:30 p.m. EDT.

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