Interview
Stress Testing the Big US Banks
- The Federal Reserve is anticipated to delay specific capital plan scenario requests until September or October while assessing the economic path, at which point banks will be asked to simulate B-shaped, U-shaped, or W-shaped recession scenarios against current stress tests to identify material weaknesses.
- All banks in the coverage universe are projected to pass the upcoming stress test due to existing excess capital positions, with aggregate excess capital estimated at approximately $140 billion.
- This aggregate capital buffer is expected to facilitate over one trillion dollars in incremental loan demand while enabling banks to sustain credit to the real economy and market liquidity during stress periods.
- Bank balance sheets are forecast to continue expanding, following a 10 percent growth in the first quarter, driven by ongoing financing and liquidity support for pandemic-affected corporations.
- Institutions are expected to increase loan loss reserves as the economic outlook has deteriorated relative to March projections, with unemployment now projected to exceed 15 percent compared to the previous 10 to 11 percent assumption.
- Earnings reports commencing early next month are expected to reflect high levels of reserve build-ups alongside substantial pre-provision operating profits.
- While sector-wide profitability is projected to remain weak during this economic environment, the number of banks expected to report actual losses in the second quarter is anticipated to be minimal.