The Federal Reserve Board announced results from its annual bank stress test, demonstrating large banks are well-positioned to weather a severe recession, the regulator said.
Among the 23 banks passing the stress test are the four largest RV indirect lenders, according to Statistical Surveys Inc.: Bank of America; BMO Financial, which recently bought Bank of the West; M&T Bank and U.S. Bank.
“Today’s results confirm that the banking system remains strong and resilient,” said Michael Barr, Federal Reserve vice chair for supervision. “At the same time, this stress test is only one way to measure that strength. We should remain humble about how risks can arise and continue our work to ensure that banks are resilient to a range of economic scenarios, market shocks, and other stresses.”
The stress test simulated each bank’s conditions during a severe global recession. The recession included a 40% decline in commercial real estate prices, a substantial increase in office vacancies and a 38% decline in house prices. The unemployment rate rose by 6.4% to a peak of 10% and economic output declined commensurately.
All 23 banks tested remained above their minimum capital requirements during the hypothetical recession, despite total projected losses of $541 billion.
The Federal Reserve said the test’s commercial real estate focus showed large banks would be able to continue lending despite experiencing heavy losses.
The individual results from the stress test factor directly into a bank’s capital requirements, mandating each bank to hold enough capital to survive a severe recession and financial market shock.