Stress test reveals how top banks would weather an economic crash
US banking giants are strongly positioned to absorb the shock of a deep recession and continue lending even in a downturn, according to the Federal Reserve.
The central bank said that the results of its yearly banking stress test, released this afternoon, showed that the banking system remains “strong and resilient” with all 23 tested banks remaining above their minimum capital requirements during the hypothetical recession.
The 2023 stress test gamed a global recession with commercial real estate prices falling by 40%, a big increase in office vacancies, and a 38% drop in house prices, with the unemployment rate jumping to 10% and economic output plummeting.
In that eventuality, the projected losses sustained by the largest banks would total $541 billion, according to the Fed.
Large banks would be able to continue lending even if they took a big hit in their commercial real estate portfolios, the Fed said, with the institutions tested this time around holding around 20% of the office and downtown commercial real estate loans held by banks across the market.
Of those projected losses, over $100 billion would stem from commercial real estate and residential mortgages, with $120 billion from credit card losses.
Fed vice chair for supervision Michael Barr said that while the results showed the robustness of the US banking system, the stress test was “only one way” to measure its 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,” he said.
