The Federal Reserve released the annual bank stress test results on Wednesday, drawing significant attention to the performance of large banks

According to the financial news app Zhitong Finance, the Federal Reserve will announce the annual bank stress test results after the U.S. stock market closes on Wednesday. Due to the significant pressure that high interest rates from the Federal Reserve bring to banks, this report may attract special attention from the market. If the test results show a high proportion of banks meeting the standards, it may raise concerns in the market about the Federal Reserve delaying interest rate cuts; if the test results show a large proportion of banks facing risks, it may lead to predictions that the Federal Reserve will cut interest rates as soon as possible.

Why does the Federal Reserve conduct stress tests on banks?

The U.S. bank stress tests were introduced after the 2008 financial crisis to assess banks' capital levels and their ability to withstand risks. In the tests, the balance sheets of large banks are tested for their performance under assumed severe economic recession conditions. The results of these tests determine the capital banks need to maintain healthy operations, as well as the capital banks can return to shareholders through stock buybacks and dividends. Normally, the Federal Reserve does not allow banks to announce dividend and stock buyback plans a few days after the stress test results are released.

How are they evaluated?

The annual bank stress test evaluates whether banks can maintain a minimum capital adequacy ratio of 4.5% or higher during the assumed economic recession period. Banks with strong performance usually have capital adequacy ratios higher than this requirement. In addition, the largest global banks in the U.S. must also meet an additional 1% G-SIB surcharge.

The test results will help determine the so-called stress test capital buffer for each bank. This refers to the common equity tier 1 capital (CET1) that banks must hold as a certain percentage of their risk-weighted assets beyond the minimum requirements set by regulators. The Federal Reserve will disclose the size of each bank's stress test capital buffer in the months following the release of the test results.

The performance of the largest U.S. banks, especially JPMorgan Chase (JPM.US), Citigroup (C.US), Wells Fargo (WFC.US), Bank of America (BAC.US), Goldman Sachs (GS.US), and Morgan Stanley (MS.US), will be closely watched.

The Federal Reserve will disclose the overall losses of the tested banks under its assumed test scenarios, as well as the performance of each bank and specific portfolios (such as credit cards or mortgages). The Federal Reserve adjusts the test scenarios every year. Last year's stress test scenarios included a peak unemployment rate of 10%, a 40% drop in commercial real estate prices, a 38% decline in house prices, and short-term interest rates dropping to nearly zero. This year's scenarios are largely consistent with last year's.

In last year's stress tests, commercial real estate was a focal point. Under the assumed scenarios, properties such as office buildings were expected to suffer losses at a level about three times that of the 2008 financial crisis. While large banks would incur significant losses under the assumed scenarios, they would still be able to continue lending.

Additionally, banks with significant trading operations will face scenarios of "global market shock," with some banks also facing scenarios of the largest counterparty default. This year's tests also include additional exploratory economic and market shocks, which will not contribute to setting capital requirements but will help the Federal Reserve assess whether it should expand tests in the future Market shocks will apply to the largest banks, and all 32 banks will undergo economic stress tests. Michael Barr, the vice chairman responsible for supervision at the Federal Reserve, has stated that various scenarios can help the tests better identify weaknesses in banks.

Which banks underwent the tests?

In 2024, 32 banks underwent stress tests, up from 23 the previous year. This is because the Federal Reserve decided in 2019 to allow banks with assets ranging from $100 billion to $250 billion to undergo testing every other year.

The 32 banks that underwent stress tests include: Ally Financial (ALLY.US), American Express (AXP.US), Bank of America, BNY Mellon (BK.US), Barclays Bank (BCS.US), Bank of Montreal (BMO.US), Capital One (COF.US), Charles Schwab (SCHW.US), Citigroup, Citizens Financial (CFG.US), Credit Suisse Holdings (USA), Deutsche Bank (USA), Discover Financial Services (DFS.US), Fifth Third Bank (FITB.US), Goldman Sachs, HSBC North America Holdings, Huntington Bank (HBAN.US), JPMorgan Chase, KeyCorp (KEY.US), M&T Bank (MTB.US), Morgan Stanley, Northern Trust (NTRS.US), PNC Financial Services Group (PNC.US), RBC USA Group Holdings, Regions Financial Corporation, Santander Holdings (USA), State Street Bank (STT.US), TD Bank US Holdings, Truist Financial (TFC.US), UBS Americas Holdings, UBS (USB.US), and Wells Fargo