IF a severe recession hits, how would the US banks fare? Based on the stress testing of the 23 large US banks, they have enough capital to withstand it. 👌 It means the banks will be able to continue lending to consumers and businesses under a hypothetical stress scenario. 🟨 The Scenario This year’s stress scenario includes: - A 12.5% GDP contraction in early 2023 - A 10% unemployment rate in Q3 2024 - 38% drop of residential housing prices - 40% decrease of commercial real estate It also includes an extra market shock - applied to the 8 banks with large trading operations. It is for study purposes only, not impacting capital requirements. 🟩 The Result In the projected 9 quarters period: - A max 2.3% decline in the aggregate common equity tier 1 capital ratio. - An aggregated loss of $541 billion; 78% or $424 billion in loan loss. - Mortgage portfolio loss rate 2.7%, credit card 17.4% 🟦 The Debate While some banks have complained about the scenario design, it is still a useful tool to impose transparency and manage systemic risk. It is arguable whether stress tests would have alerted the regional banks that collapsed earlier this year. Bypassing or passing the hypothetical test does not matter, if you cannot survive the real-world test. Source: 2023 Federal Reserve Stress Test Results
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