U.S. Stress Tests Show Banks' Capital Resilience

The Federal Reserve published the results of the latest round of stress testing with 31 banks subject to this year's tests. Positively, all banks showed sufficient capital to weather a severe economic downturn.

Key highlights:

-- All banks participating cleared the Federal Reserve stress test despite a larger number of banks and a more severe adverse scenario, which featured a deep recession with higher unemployment and a significant reversal in inflation.

-- The main differences between last year's adverse scenario and the 2024 adverse scenario were around inflation, short-term rates, and commodities prices, whereas the 2024 scenario involved significantly higher inflationary pressures, and the 2023 scenario was disinflationary.

-- We expect banks will begin announcing capital plans but expect shareholder returns, especially in the in the form of stock buybacks, to remain relatively muted given expected changes to regulatory capital requirements and generally higher stress capital buffers following this year's stress test.

According to John Mackerey, Senior Vice President, Sector Lead, North American Financial Institutions Ratings at Morningstar DBRS, “Overall, the stress test results reinforce our view that the banks' capital levels remain resilient in an adversely stressed environment with recovery in earnings and capital generation following the trough of the hypothetical recession.”