3 Big Winners from Federal Reserve Bank Stress Testing
The Federal Reserve recently released the results of its 2023 stress testing exercise, in which it puts the largest and most complex banks through a hypothetical adverse economic scenario categorized by a severe recession and high unemployment. The Fed then models out a bank's financials, including its capital, profitability, loan losses, and more, to ensure that the U.S. banking system could not only survive a severe economic scenario but also continue to lend.
Stress testing is also closely watched by investors because it helps determine regulatory capital requirements for banks, namely the common equity tier 1 (CET1) capital ratio, which looks at a bank's core capital, expressed as a percentage of its risk-weighted assets such as loans. The CET1 ratio determines how much capital banks must hold, and therefore how much excess capital they have for dividends and share repurchases.
In this year's stress testing, all 23 banks breezed through the exercise, having ample capital despite a scenario that included unemployment rising to 10% in the two-year stressed window, and commercial real estate prices falling a whopping 40%. Here are the three big winners from this year's stress testing.
Source Fool.com
