WASHINGTON—The nation’s largest banks weathered the worst of the coronavirus pandemic with plenty of capital, the Federal Reserve said Thursday upon release of stress-test results that demonstrated for the first time how balance sheets were affected by COVID-19.
All 23 of the banks tested are cleared after June 30 to resume full dividend payments and share repurchases for the first time in a year. The Fed said each of the firms has sufficient capital levels to “continue lending to households and businesses during a severe recession.”
“Over the past year, the Federal Reserve has run three stress tests with several different hypothetical recessions and all have confirmed that the banking system is strongly positioned to support the ongoing recovery,” Fed Vice Chair for Supervision Randal Quarles said in a statement.
Nineteen of the biggest banks were subjected to the annual Dodd-Frank Act Stress Tests and the Comprehensive Capital Analysis and Review examinations, plus four smaller firms that chose to opt in: BMO Financial Corp., MUFG Americas Holdings, RBC U.S. Group Holdings and Regions Financial.
Under rules the Fed finalized in 2019, banks with assets of between $100 billion and $250 billion are only required to undergo stress tests every other year. However, those banks can choose to opt in to stress tests in an “off year” if they wish to make changes to their capital distribution plans.
Banks subject to the stress tests are required to submit data from their balance sheets as of year-end 2020. The Fed tests those balance sheets against baseline and severely adverse scenarios.
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The Fed found that under that scenario, all of the banks subjected to the stress tests would collectively suffer $470 billion in losses, with almost $160 billion losses from commercial real estate and corporate loan investments. Still, bank capital ratios would decline just to 10.6% on average — well above the 4.5% minimum requirement.
The central bank also noted that the stressed capital ratios varied widely across the 23 banks tested, which reflects the differences in the composition of each firm’s loan portfolios. HSBC North America Holdings experienced the lowest capital ratio under the severely adverse scenario at 7.3%, while DB USA — the U.S.-based affiliate of Deutsche Bank — had the highest, at 23.2%.
The results of the CCAR stress test are used to dictate a firm’s planned capital distributions for the year. Banks have to comply with a so-called stress capital buffer, which is calculated as the difference between a bank’s starting and projected capital ratios under the “severely adverse” stress-test scenario, and factors in a bank's common stock dividends as a percentage of risk-weighted assets.
The Fed did not publish the stress capital buffer requirements Thursday, to allow for banks to make changes to their original capital distribution plans. But banks will be able to disclose their stress capital buffer requirements and planned capital distributions on Monday after the market closes, if they choose to do so.
The Fed will then release the final capital plans before the stress capital buffer requirement is set to take effect in the fourth quarter.
Also on Thursday, the Fed said it had corrected an error in both of last year’s stress tests that affected the results for BNP Paribas USA, and altered the bank’s pre-provision net revenue, projected pretax net income and projected capital ratios accordingly. However, senior Fed officials said that the correction would not affect the bank’s stress capital buffer.
