The Board of Governors of the Federal Reserve System ("FRB") released the results of its 2017 Dodd-Frank Act Stress Test ("DFAST").
The FRB-implemented exercise tested the ability of major U.S. bank holding companies ("BHCs") to withstand a financial crisis. The FRB used "adverse" and "severely adverse" hypothetical market scenarios to assess the "systemically important" banks. In both supervisory scenarios, the FRB imposed conditions to simulate significantly increased unemployment and market stress.
The stress tests evaluated thirty-four bank holding companies for nine hypothetical quarters. This year's "severely adverse" scenario featured a slightly more severe downturn in the U.S. economy as compared to the DFAST 2016 scenario. The new scenario was characterized by a severe global recession with the U.S. unemployment rate rising by approximately 5.25 percentage points to 10 percent, accompanied by heightened stress in corporate loan markets and commercial real estate. In this scenario, the FRB projected aggregate loan portfolio losses of $383 billion at these BHCs.
According to FRB Governor Jerome Powell, the results demonstrate that:
"[E]ven during a severe recession, our large banks would remain well capitalized. This would allow them to lend throughout the economic cycle, and support households and businesses when times are tough."
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