2024 Fed Stress Test: Big Banks Face Deeper Losses But Maintain Strong Capital Positions in Severe Recession Scenario (FIXED) – SPDR Select Sector Fund – Financial (ARCA:XLF)

Editor’s note: This article mistakenly included stock information for Citizens Inc. rather than Citizens Financial Group Inc., which is the company mentioned in the Federal Reserve’s stress test report, and has been corrected.

The Federal Reserve’s annual banking stress test Wednesday finds that while big banks face larger projected losses than last year in a downturn scenario, they remain well-positioned to endure a severe recession and maintain their capital requirements above the minimum thresholds.

“This year’s stress test shows that large banks have sufficient capital to withstand a highly stressed scenario and meet their minimum capital ratios,” said the Fed’s vice chairman for supervision. Michael S. Barr.

Even though the adverse scenario for this year’s stress test is as severe as last year’s, it led to larger losses due to slightly riskier bank balance sheets and increased spending, he said. he declares.

Reflecting on the 2023 regional banking crisis, Barr emphasized that important lessons have been learned.

The Fed said that “large banks are generally well positioned to withstand a sudden financial shock in the form of a shift in deposits.” Additionally, banks’ net interest income remains resilient in a high-rate environment, even accounting for financial shock assumptions.

Details and results of the 2024 banking stress test

This year’s test showed that all 31 banks remained above their minimum Common Equity Tier 1 (CET1) requirements despite projected total hypothetical losses approaching $685 billion.

The hypothetical scenario for this year’s stress test mirrors that of last year’s severe global recession, including a 40% decline in commercial real estate prices, a significant increase in office vacancies, and a 36% decline in real estate prices. The unemployment rate peaks at 10% during the stress test, with a corresponding decline in economic output.

Under the stressed scenario, the overall CET1 capital ratio is expected to decrease by 2.8 percentage points, from 12.7% to 9.9%. Although this decline is greater than that of last year’s test, it remains within the range of recent tests.

Three main factors contribute to the larger capital decline in this year’s test:

  1. Increase in credit card losses: Substantial increases in credit card balances and higher delinquency rates lead to larger credit card losses. The banks most exposed to credit card losses are Ally Financial Inc. ALLY, Discover financial services DFS And Goldman Sachs GS.
  2. Riskier corporate credit portfolios: Banks have downgraded their business loans, reflecting increased risk and leading to higher projected losses for businesses. The banks expected to face the greatest impact on their business loan balances are Discover Financial Services, Barclays SA BCS And Citizens Financial Group Inc CFG.
  3. Higher expenses and lower fee income: The reduction in projected income due to higher expenses and lower fee income exacerbates the decline in capital.

Projected losses include $175 billion in credit card losses, $142 billion in commercial and industrial loans and $77 billion in commercial real estate.

“Large banks’ exposure to commercial real estate (CRE) debt remains an area of ​​focus for Federal Reserve supervisors,” the report said.

The 2024 extreme adverse supervisory scenario includes increased stress in commercial real estate (CRE), with a 40% decline in commercial real estate prices.

Although projected losses on loans to office buildings have increased due to deteriorating fundamentals in the office sector, the Fed said these losses are offset by a decrease in projected losses on loans to hotels and office buildings. retail, as market fundamentals for these sectors have improved over the last year.

Market reactions: Capital One Financial Corporation COFCitizens Financial Group and Goldman Sachs were among the worst performers in the SPDR funds for selected financial sectors XLF components in aftermarket trading at 5:05 p.m. ET. The most efficient was Truist Financial Corp. TFCup 1.7%

Read now: Yen Falls to 160 Against Dollar, Lowest Level Since December 1986: Is Bank of Japan Intervention Imminent?

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