Board of Governors of the Federal Reserve System

Figure 1. How stress testing works for large banks

Caption: The Federal Reserve conducts stress tests to ensure that large banks are sufficiently capitalized and able to lend to households and businesses even in a severe recession. The stress tests evaluate the financial resilience of banks by estimating losses, revenues, expenses, and resulting capital levels under hypothetical recession scenarios.

In this infographic, there are three arrows on the left side that are facing to the right.

The first arrow says, "The Federal Reserve develops stress test scenarios."

The second arrow says, "The Federal Reserve develops or selects stress test models."

The third arrow says, "Banks submit detailed bank data."

The arrows are pointing to box in the middle of the figure that says, "Using the scenario data and bank data as variables in the stress test models, the Federal Reserve projects how banks are likely to perform under a hypothetical economic conditions."

The middle box is pointing to a box on the right side that says, "The Federal Reserve uses the results of the supervisory stress test, in part, to set capital requirements for participating banks."

Figure 2. Aggregate common equity capital ratio for 23 banks in the 2023 stress test

Figure 3. When bank holding companies are required to participate in the stress test

Caption: The Board conducts stress tests of bank holding companies it supervises on an annual or two-year cycle. Based on a bank holding company’s financial condition, size, complexity, risk profile, risks to the U.S. economy, or scope of operations or activities, the Board may conduct a stress test of a bank holding company more or less frequently than required.

The figure has two two-column boxes.

In the top box, in the left column, it says "Every year." In the right column, there are three bullets. The top bullet says, "U.S. global systemically important bank holding companies (Category I)." The second bullet says, "Domestic and foreign bank holding companies with $700 billion or more in total assets or $75 billion or more in cross-jurisdictional activity (Category II)." The bottom bullet says, "Domestic and foreign bank holding companies with $250 billion or more in total assets or $75 billion or more in weighted short-term wholesale funding, nonbank assets, or off-balance-sheet exposure (Category III)."

In the bottom box, in the left column, "Every 2 years (in years ending in an even number)." In the right column, there is one bullet and a note. The bullet says, "Domestic and foreign bank holding companies with $100 billion or more in total assets that do not meet the requirements for every-year stress testing (Category IV)." The note says, "Note: Bank holding companies of this asset size may also elect to participate in a stress test in a year ending in an odd number."

Figure 4. Change from 2022:Q4 to minimum common equity tier 1 capital ratio in the severely adverse scenario

Note: Estimates of minimum common equity tier 1 (CET1) capital as a percent of risk-weighted assets are for the nine-quarter period from 2023:Q1 to 2025:Q1. Negative values indicated CET1 ratio increases.

Figure A. Aggregate maximum decline in stressed common equity tier 1 capital ratio, severely adverse scenario

Figure B. 3-month Treasury yield, severely adverse scenario

Figure C. Accumulated other comprehensive income (AOCI) in capital to risk-weighted assets, starting point and stressed minimum

Figure D. Cumulative consumer and wholesale loss rate through stressed minimum, severely adverse scenario

Figure 5. Pre-tax net income rates in the severely adverse scenario

Figure 6. Projected losses in the severely adverse scenario

Figure A. Vacancy rate by property type

Figure B. Office loss rate, cumulative 9-quarter

Figure 7. Pre-provision net revenue rates in the severely adverse scenario