Fed's stress test results show banks' strength in light of the recent crisis

The largest US banks have sufficient safeguards in place to weather a severe recession while continuing lending to households and businesses, the Federal Reserve said Wednesday in its annual bank resilience test.

The Fed's stress tests carried extra weight this year after the collapse of three US banks sent shockwaves through the banking system.

All 23 banks required to take the Fed's exam fared better this year compared to last year, despite being subjected to a worst-case scenario that was even more painful than last year's.

Like last year, banks tested remained above their minimum capital requirements in the test's worst-case scenario but would stand to lose a collective $541 billion. Capital ratios would decline by 2.3% to 10.1%, more than double the requirement.

Last year's tests, which included smaller banks that are tested every other year, found that those tested would lose $612 billion and capital ratios would decline by 2.7% to 9.7%.

"Today's results confirm that the banking system remains strong and resilient," Michael Barr, the Fed's vice chair for supervision, said in a statement.

"At the same time, this stress test is only one way to measure that strength," he added. "We should remain humble about how risks can arise, and continue our work to ensure that banks are resilient to a range of economic scenarios, market shocks, and other stresses."

Barr, who oversaw the Fed's autopsy report on failed Silicon Valley Bank, previously said he's working on updating the Fed's stress-testing models based on the lessons he's learned from the recent bank failures.

Under this year's scenario, or hypothetical recession condition, the unemployment rate rose by 6.5 percentage points over the course of two years. In last year's scenario, the unemployment rate rose by 5.8 percentage points.

This year's scenario also features a more extreme and rapid decline in home prices of 38% versus last year's 28.5% decline. But no changes were made with regard to commercial real estate, an increasingly troublesome area for banks, as many offices remain vacant. Like last year, the scenario assumes a 40% plunge in commercial real estate prices.

The banks in this year's test hold roughly 20% of the office and downtown commercial real estate loans held by banks, according to the Fed. The hypothetical $100 billion losses stemming from real estate troubles tripled the levels reached during the 2008 financial crisis, the Fed said.

While all banks passed the tests, their performance varied significantly under the severe recession scenario. Notably, mid-sized banks including Capital One and Citizens Bank experienced steeper losses and took bigger hits to their capital ratios compared to the average across all 23 banks.