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Friday, June 24, 2016

Large Banks Improve Dodd-Frank Stress Test Results

The largest U.S. banks collectively showed that they can withstand a severe economic downturn and continued to improve their capital positions, according to the results of Dodd-Frank Act-mandated stress tests the Federal Reserve released.

Aggregate Tier 1 capital ratios at the 33 firms subjected to the Fed’s stress-test program would fall from an actual 12.3% in the third quarter of 2015 to the minimum level of 8.4% under the test’s most extreme hypothetical scenario – including, among other things, a spike in unemployment, a 25% decline in home prices and a 50% drop in equity prices.

Even with the hypothetical declines, capital levels at the banks would still be much higher than they were following the 2008 financial crisis, when Tier 1 capital ratios for the firms fell to about 5.5% at the end of that year.

ABA President and CEO Rob Nichols said:
The tremendous effort banks have made to build capital and liquidity has allowed them to perform strongly even under scenarios that are unrealistically severe. Fortunately, banks and regulators are continuing to learn how to make the stress test process more valuable as a forward-looking and flexible supervisory and management tool. This process would benefit even more from increased transparency, as well as involving the public in discussion about how the scenarios are developed and how the tests are administered.

View the stress test methodology and results.

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