Executive Summary
The results of this year's Dodd-Frank Act stress test (DFAST 2020) suggest that, in the aggregate, the 33 firms subject to the supervisory stress test would experience substantial losses under the severely adverse scenario but could continue lending to businesses and households, due to the substantial buildup of capital since the financial crisis.
In the severely adverse scenario, the aggregate common equity tier 1 (CET1) capital ratio would fall from an actual 12.0 percent in the fourth quarter of 2019 to its minimum of 9.9 percent, before rising to 10.3 percent at the end of nine quarters (see figure 1). The declines in capital ratios, both in the aggregate and for individual firms, are not comparable to the aggregate ratio decline disclosed last year because this year's ratios do not include the effect of common dividend distributions. The DFAST cycle begins in the first quarter of 2020 and ends in the first quarter of 2022.
Figure 1. Historical and stressed tier 1 common ratio and common equity tier 1 ratio
Source: FR Y-9C, FR Y-14A, and supervisory estimates under the severely adverse scenario.
For DFAST 2020, key components of stress test projections, such as losses and revenue, are broadly similar to those of prior years' exercises.
Aggregate losses at the 33 firms under the severely adverse scenario are projected to be $550 billion. For the 18 firms for which stress test results were disclosed both last year and this year, total losses under the severely adverse scenario are $431 billion in DFAST 2020, compared to $410 billion for the same 18 firms in DFAST 2019.
Aggregate loan losses as a percent of average loan balances in the severely adverse scenario are similar in DFAST 2020 compared to the past several years (see figure 2). The higher loss rates this year reflect, in part, the effect of the relatively more severe scenario.
Figure 2. Loan loss rates, severely adverse scenario
Note: Loan Loss rates as a percent of average total loan balances is calculated for all firms subject to the supervisory stress test in each exercise.
Aggregate projected pre-provision net revenue (PPNR) in DFAST 2020 for the 33 firms under the severely adverse scenario is projected to be $429 billion. For the 18 firms for which stress test results were disclosed both last year and this year, PPNR under the severely adverse scenario is $335 billion in DFAST 2020, compared to $327 billion for the same 18 firms in DFAST 2019. PPNR as a percent of average total assets in DFAST 2020 is broadly similar to projected PPNR in prior years' exercises (see figure 3).
Figure 3. Pre-provision net revenue as a percent of average total assets, severely adverse scenario
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.
Provisions for loan losses and PPNR are the main drivers of pre-tax net income (PTNI). Under the severely adverse scenario, the projected decline in PTNI is 1.1 percent of average total assets, compared to a decline of 0.8 last year (see figure 4). The larger decline in PTNI this year reflects a similar level of PPNR coupled with higher estimated losses.
Further details of the results are provided in the Supervisory Stress Test Results section of this report.
Figure 4. Pre-tax net income as a percent of average total assets, severely adverse scenario
Note: Pre-tax net income as a percent of average total assets is calculated for all firms subject to the supervisory stress test in each exercise.
This year, the Federal Reserve is also publicly disclosing the aggregate results of a sensitivity analysis conducted under a range of plausible downside scenarios stemming from recent events related to the coronavirus outbreak and response, referred to as the "COVID event." For further details, see Assessment of Bank Capital during the Recent Coronavirus Event.3
Differences between the DFAST 2020 Results Disclosure and Previous Results Disclosures
Two-Year Cycle Firms Included This Year
On October 10, 2019, the Board finalized a rule to amend its prudential standards to exempt firms with total consolidated assets of less than $100 billion from the supervisory stress test and to subject certain firms with total consolidated assets between $100 billion and $250 billion to the supervisory stress test requirements on a two-year cycle.4 In DFAST 2020, the Federal Reserve is publishing results for 33 firms subject to supervisory stress testing requirements, which includes 18 firms subject to annual supervisory stress test requirements and 15 firms subject to the two-year supervisory stress test cycle.5 Because only 18 firms were subject to the supervisory stress test last year, the aggregate results reported this year are not fully comparable to last year's reported aggregate results.6
Removal of the Adverse Scenario
The Board also amended its stress testing requirements to remove the adverse scenario in its supervisory stress test, in accordance with changes to the Dodd-Frank Act.
Changes to Capital and Balance Sheet Calculations
In March 2020, the Board amended its stress testing requirements to assume that a firm maintains a constant level of assets over the projection horizon and to assume that a firm will not pay any common dividends or make any issuance of common or preferred stock.7 In addition, the Federal Reserve will no longer include capital actions or other changes in the balance sheet associated with any business plan changes.8 The Federal Reserve also made changes to its capital projections in order to account for changes made to the capital framework in the tailoring rules and the capital simplification rule.
Overview
This report provides
- details of the supervisory severely adverse scenario used in DFAST 2020;
- an overview of the analytical framework and methods used to generate the Federal Reserve's projected results, highlighting notable changes from last year's program;9
- additional details about the Federal Reserve's assumptions in the 2020 supervisory stress test; and
- the results of the supervisory stress test under the severely adverse scenario for the firms that participated in DFAST 2020, presented both for individual institutions and in the aggregate.
References
3. See Board of Governors, https://www.federalreserve.gov/publications/files/2020-sensitivity-analysis-20200625.pdf. Return to text
4. See 84 Fed. Reg. 59032 (Nov. 1, 2019). Return to text
5. The 33 firms required to participate in DFAST 2020 are 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
6. The 18 firms required to participate in DFAST 2019 were 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; UBS Americas Holdings LLC; U.S. Bancorp; 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 2019.
In February 2019, the Federal Reserve announced that certain firms with total consolidated assets between $100 billion and $250 billion would not be subject to the company-run and supervisory stress testing requirements nor the requirement to submit a capital plan during the 2019 cycle. See Board of Governors of the Federal Reserve System, "Federal Reserve Board Releases Scenarios for 2019 Comprehensive Capital Analysis and Review (CCAR) and Dodd-Frank Act Stress Test Exercises," press release, February 5, 2019, https://www.federalreserve.gov/newsevents/pressreleases/bcreg20190205b.htm. Return to text
7. See 85 Fed. Reg. 15576 (Mar. 18, 2020). Return to text
8. The implementation of these new capital action assumptions in the company-run stress tests will not become effective until the 2021 stress test cycle. Thus, the results of the 2020 company-run and supervisory stress tests will be less comparable. Return to text
9. See Board of Governors of the Federal Reserve System, Dodd-Frank Act Stress Test 2020: Supervisory Stress Test Methodology (Washington: Board of Governors, March 2020), https://www.federalreserve.gov/publications/files/2020-march-supervisorystress-test-methodology.pdf. Return to text