Federal Reserve Releases Results of Latest Bank Stress Tests

Earlier today, the Federal Reserve released the results of their most recent round of bank "stress tests".

Of the 30 banks that were included in the test, only one (Zions Bancorp) was found to have insufficient capital levels during a "severely adverse" two-year downturn scenario.

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Do BHCs (Bank Holding Companies) have sufficient capital to "continue lending to support real economic activity while meeting their financial obligations, even under stressful economic conditions"? This is the question that the stress test (or DFAST) looks to answer.

The Federal Reserve has three stress-test scenarios - baseline, adverse and severely adverse.

Under the severely adverse scenario, the following things take place over a two-year period:

-real GDP falls by almost 5%
-unemployment rate spikes to 11.25%
-equities fall nearly 50%
-housing prices drop 25%

Under the adverse scenario, the following things take place over a two-year period:

-real GDP declines 1%
-unemployment rate rises to 9.25%
-equity prices decline by 36%
-housing and commercial real estate prices drop between 10-20%

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Under the "adverse" scenario, the 30 banks included in the latest round of stress tests would post a cumulative $266.5 billion in loan losses. Citigroup Inc. would lead the way under this scenario with an estimated $43.4 billion in loan losses.

Under the "severely adverse" scenario, the 30 banks would post cumulative loan losses of $366.1 billion, with Citigroup Inc. leading the way with an estimated $55.5 billion in losses.

Source: FederalReserve.gov - Press Release

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