Executive Summary
Consistent with the two rounds of stress tests last year, the results of Dodd-Frank Act Stress Test (DFAST) 2021 show that large firms have sufficient capital levels to absorb losses during stressful conditions. This is due, in large part, to the substantial buildup of capital since the 2007–09 financial crisis (see figure 1).
Figure 1. Aggregate common equity capital ratio
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Note: The Federal Reserve's evaluation of a firm's common equity capital was initially measured using a tier 1 common capital ratio but now is evaluated using a common equity tier 1 capital ratio, which was introduced into the regulatory capital framework with the implementation of Basel III to replace Basel I. Not all of the 23 firms included in DFAST 2021 reported data for all periods since 2009.
Source: FR Y-9C.
The aggregate results suggest the 23 firms that participated in the supervisory stress test would experience substantial losses under the severely adverse scenario but would remain well above their minimum risk-based requirements and could continue lending to businesses and households.2
As a result, all additional, temporary capital distribution restrictions imposed following the outbreak of the coronavirus and response (the "COVID event") will expire on June 30 per the Board's previous announcement.3 Large firms will remain subject to the normal restrictions imposed by the Board's regulatory capital framework, inclusive of the stress capital buffer (SCB). The firms participating in DFAST 2021 will be subject to the SCB requirements based on the DFAST 2021 results beginning October 1.4
Projected Capital Ratios
In the severely adverse scenario, the aggregate common equity tier 1 (CET1) capital ratio falls from an actual 13.0 percent in the fourth quarter of 2020 to its minimum of 10.6 percent, before rising to 11.2 percent at the end of the first quarter of 2023 (see table 1). The aggregate CET1 ratio remains well above the required minimum levels throughout the projection horizon.5
Table 1. Aggregate capital ratios, actual, projected 2021:Q1–2023:Q1, and regulatory minimums
Percent
| Regulatory ratio | Actual 2020:Q4 | Stressed minimum capital ratios, severely adverse | Minimum regulatory capital ratios |
|---|---|---|---|
| Common equity tier 1 capital ratio | 13.0 | 10.6 | 4.5 |
| Tier 1 capital ratio | 14.7 | 12.3 | 6.0 |
| Total capital ratio | 17.1 | 14.9 | 8.0 |
| Tier 1 leverage ratio | 8.0 | 6.6 | 4.0 |
| Supplementary leverage ratio | 7.7 | 5.5 | 3.0 |
The 2.4 percent decline in the aggregate CET1 ratio in DFAST 2021 was slightly larger than the 2.1 percent decline in DFAST 2020 (see figure 2) and is comparable to declines in recent DFAST exercises.
Figure 2: Aggregate maximum decline in stressed common equity tier 1 ratio, severely adverse scenario
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Note:The bar represents the aggregate maximum common equity tier 1 (CET1) ratio decline of the firms subject to the supervisory stress test in each exercise. The value for DFAST 2019 is an estimate of the CET1 ratio decline had the stress capital buffer rule been in place at that time. For purposes of this figure, the DFAST 2019 value assumes: (1) a constant level of assets over the projection horizon, (2) no common dividend payments, (3) no issuances or repurchases of common or preferred stock (except those related to business plan changes), and (4) fully phased-in capital deductions.
The larger decline in aggregate CET1 capital ratios compared with DFAST 2020 is due in part to lower projected pre-provision net revenue (PPNR) resulting from a flatter yield curve and a larger share of low-yielding assets on bank balance sheets. The decline in projected PPNR is a continuation of the trend observed in the December 2020 Stress Test. Aggregate PPNR in DFAST 2021 under the severely adverse scenario is projected to be $298 billion, below the DFAST 2020 amount of $354 billion for the same firms. PPNR as a percent of average total assets in DFAST 2021 is lower than previous exercises (see figure 3).
Figure 3. Pre-provision net revenue as a percent of average total assets, severely adverse scenario
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Note: Pre-provision net revenue as a percent of average total assets is calculated for all firms subject to the supervisory stress test in each exercise.
Aggregate losses under the DFAST 2021 severely adverse scenario are projected to be $474 billion, of which $353 billion are projected loan losses. Both aggregate and loan losses are little changed from DFAST 2020. Aggregate loan losses as a percent of total loan balances are similar to the DFAST 2020 loan loss rate (see figure 4). An increase in losses on corporate and commercial real estate (CRE) loans offset a decline in consumer loan losses. Loan loss rates in DFAST 2021 are lower than those projected in the December 2020 Stress Test due to lower losses on credit cards and CRE loans. Despite similar loan losses compared to DFAST 2020, projected provisions for loan losses are smaller due in part to the large allowances firms built in 2020 in response to the COVID event and changes to accounting rules.
Figure 4. Loan loss rates, severely adverse scenario
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Note: Loan loss rates as a percent of average total loan balances are calculated for all firms subject to the supervisory stress test in each exercise.
Further details of the results are provided in the "Supervisory Stress Test Results" section of this report, which are presented both in the aggregate and for individual firms.
Comparison between the DFAST 2021 Results Disclosure and Previous Results Disclosures
Election to Participate in DFAST 2021 for Two-Year Cycle Firms
Starting with this year's stress test, firms that are on a two-year stress test cycle can choose to participate in the stress test in years where they would otherwise not be subject to it.6 BMO Financial Corp., MUFG Americas Holding Company, RBC US Group Holdings LLC, and Regions Financial Corporation opted into this year's test. Because 33 firms were subject to DFAST 2020 and the December 2020 Stress Test, the aggregate results reported this year are not fully comparable with either stress test conducted in 2020.7
Overview
This report provides
- details of the supervisory severely adverse scenario used in DFAST 2021;
- an overview of the analytical framework and methods used to generate the Federal Reserve's projected results, highlighting several changes for DFAST 2021;8 and
- the results of the supervisory stress test under the severely adverse scenario for the firms that participated in DFAST 2021, presented both in the aggregate and for individual firms.
References
2. The 19 firms required to participate in DFAST 2021 are Bank of America Corporation; The Bank of New York Mellon Corporation; Barclays US LLC; Capital One Financial Corporation; Citigroup Inc.; Credit Suisse Holdings (USA), Inc.; DB USA Corporation; The Goldman Sachs Group, Inc.; HSBC North America Holdings Inc.; JPMorgan Chase & Co.; Morgan Stanley; Northern Trust Corporation; The PNC Financial Services Group, Inc.; State Street Corporation; TD Group US Holdings LLC; Truist Financial Corporation; U.S. Bancorp; UBS Americas Holding LLC; and Wells Fargo & Company. In addition to DB USA Corporation, DWS USA Corporation, a second U.S. intermediate holding company subsidiary of Deutsche Bank AG, is subject to DFAST 2021. The four firms that elected to participate in DFAST 2021 are BMO Financial Corp.; MUFG Americas Holdings Corporation; RBC US Group Holdings LLC; and Regions Financial Corporation. Return to text
3. Because of the material uncertainty regarding the trajectory of the economy following the COVID event and to continue to preserve the strength of the banking sector, the Board imposed temporary restrictions on dividends and share repurchases for firms with over $100 billion in total assets. In March 2021, the Board announced that these temporary restrictions would end for firms that remained sufficiently capitalized based on the results of DFAST 2021. Return to text
4. The SCB requirement of large firms that did not participate in DFAST 2021 will be adjusted to reflect any changes to those firms' planned common dividends but will not be adjusted to reflect the updated stress test results; this adjusted SCB requirement will be effective on October 1, 2021. See 12 C.F.R. § 225.8(f)(4). These firms include Ally Financial Inc.; American Express Company; BNP Paribas USA, Inc.; Citizens Financial Group, Inc.; Discover Financial Services; Fifth Third Bancorp; Huntington Bancshares Incorporated; Keycorp; M&T Bank Corporation; and Santander Holdings USA, Inc.
The Federal Reserve expects firms to wait until after 4:30 p.m. EDT on Monday, June 28, 2021, to publicly disclose any information about their planned capital actions and SCB requirements. This will give all firms sufficient time to examine and understand their results. Return to text
5. The declines in capital ratios depicted in table 1 do not include the effects of capital actions or other changes in the balance sheet associated with any business plan changes. Return to text
6. On January 19, 2021, the Board approved a rule to tailor the requirements of the Board's capital plan rule based on risk. See 86 Fed. Reg. 7927 (Feb. 3, 2021). Return to text
7. The 33 firms required to participate in DFAST 2020 were Ally Financial Inc.; American Express Company; Bank of America Corporation; The Bank of New York Mellon Corporation; Barclays US LLC; BMO Financial Corp.; BNP Paribas USA, Inc.; Capital One Financial Corporation; Citigroup Inc.; Citizens Financial Group, Inc.; Credit Suisse Holdings (USA), Inc.; DB USA Corporation; Discover Financial Services; Fifth Third Bancorp; The Goldman Sachs Group, Inc.; HSBC North America Holdings Inc.; Huntington Bancshares Incorporated; JPMorgan Chase & Co.; KeyCorp; M&T Bank Corporation; Morgan Stanley; MUFG Americas Holdings Corporation; Northern Trust Corporation; The PNC Financial Services Group, Inc.; RBC US Group Holdings LLC; Regions Financial Corporation; Santander Holdings USA, Inc.; State Street Corporation; TD Group US Holdings LLC; Truist Financial Corporation; U.S. Bancorp; UBS Americas Holding LLC; and Wells Fargo & Company. In addition to DB USA Corporation, DWS USA Corporation, a second U.S. intermediate holding company subsidiary of Deutsche Bank AG, was subject to DFAST 2020. Return to text
8. See Board of Governors of the Federal Reserve System, Dodd-Frank Act Stress Test 2021: Supervisory Stress Test Methodology (Washington: Board of Governors, April 2021), https://www.federalreserve.gov/publications/files/2021-april-supervisory-stress-test-methodology.pdf. Return to text