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On June 27, the Federal Reserve Board issued the aggregate and individual results of the supervisory stress test (also known as the Dodd-Frank Act Stress Test or DFAST, as these tests are required by Section 165 of the Dodd-Frank Act), which assesses whether banks are sufficiently capitalized to absorb losses during a severe recession.
The Federal Reserve stated that all 22 banks tested remained above their minimum CET1 capital requirements during the stress scenario, after absorbing total projected hypothetical losses of more than $550 billion.
Most banks announced their estimated stress capital buffer ("SCB") requirements under the Comprehensive Capital Analysis and Review ("CCAR"). The Federal Reserve is likely to publish all applicable banking organizations' official SCBs by August 31. The SCB is driven by the DFAST results and is calculated by adding the maximum decline in each banking organization's common equity tier 1 ("CET1") ratio under the DFAST's severely adverse scenario plus four quarters of planned dividends. The minimum SCB is 2.5%. This is added to the 4.5% capital regulation minimum and any G-SIB surcharge or countercyclical capital buffer in place to show the total CET1 required. Many banks saw their SCBs reduced this year compared to 2024 results, some saw no change (generally those already at the 2.5% minimum), and one bank saw an increase.
The Bank Policy Institute ("BPI"), a leading trade association for large banks, released a statement regarding the release of the stress results. BPI noted that the results show large banks' resilience and stated, "Today's stress test results reaffirm the strength of the nation's largest banks, but they also serve as an annual reminder of persistent flaws in the framework. Banks continue to hold excess capital not because of risk, but to hedge against uncertainty and year-to-year volatility in the Fed's modeled results, now openly acknowledged by the Fed." BPI continued, "By this time next year, we are optimistic the Federal Reserve will have instituted a stress testing framework that is transparent, subject to public comment, consistent with the law and, therefore, a more accurate and less volatile assessment of banks' capital needs under stress."
The last sentence in the BPI statement is in reference to the FRB's proposal to change the calculation of the SCB to reduce the volatility of the SCB by, among other things, averaging the declines projected in the stress test with the prior two years' stress test results.
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