On June 25, 2020, the US Federal Reserve (Fed) published the results of both, the Dodd-Frank Act Stress Tests (DFAST) and also the COVID-sensitivity analysis. While all banks were able to comfortably pass the DFAST thresholds, some weaknesses were revealed under the harsher COVID scenarios.
Key Take-aways
The Fed's DFAST results projected that under the severely adverse scenario, the aggregate common equity tier 1 (CET1) ratio of all 33 banks could decline from 12.0% at end- 2019 to a minimum point of 9.9% through to the first quarter of 2022. One non-US bank was projected to see its CET1 decline to 5.4%, suffering from a low starting point (relative to other non-US banks)
The Fed also carried out alternative, COVID-driven scenarios with V-, U- and W-shaped recovery paths. Bank-specific outcomes were not disclosed but it was revealed that a quarter of the banks would see their minimum CET1 ratios decline to well below 6% under the U- and W-shaped scenarios (where unemployment rates were assumed to peak at 15.6% and 16.0% respectively)
Most banks said they would maintain quarterly dividends after the Fed notified the preliminary stress capital buffers and gave leeway for limited dividends; share buyback has been disallowed
The 2020 CCAR is likely to be a prolonged exercise, with periodic capital planning resubmissions, as the Fed intends to closely monitor the impact of the COVID-related economic outlook
