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July 03, 2019

The US Federal Reserve 2019 stress test results



On June 27, 2019, the Federal Reserve (Fed) published its ninth annual Comprehensive Capital Analysis and Review (CCAR) results. These follow the release of the Dodd-Frank Act Stress Test (DFAST) results on June 21, 2019. This report discusses key findings from the results.


Summary of CCAR results


  • All banks passed the quantitative tests. The Fed’s ninth annual CCAR results showed that all banks had surpassed the minimum capital thresholds. Under the severely adverse scenario, the aggregate Common Equity Tier 1 (CET1) ratio of all 18 banks was projected to decline from 12.3% at end-FY18 to a minimum of 6.6% over the nine quarters to 1Q21. This year, just two banks had to submit revised capital action plans following the DFAST results (compared with three of the same 18 participants last year). JPMorgan Chase & Co (JPM) had to re-submit for the second year running, while Capital One had to do the same for the second time in three years. In their original submissions, Capital One fell short of the thresholds on CET1, Tier 1 and Total capital ratios, while JPM fell marginally short on its CET1, Tier 1 leverage and the supplementary leverage ratio (SLR).
  • Credit Suisse USA receives conditional non-objection. The Fed gave a conditional non-objection to Credit Suisse Holdings (USA) Inc, requiring it to address certain qualitative weaknesses and resubmit its capital plan by October 27, 2019. The identified weaknesses relate to the bank's assumptions to project stressed trading losses. On the other hand Deutsche Bank (DB) USA, which failed on qualitative grounds in last year's test, passed unscathed this year. Further, DB’s second intermediate holding company (IHC), namely DWS USA Corporation, also cleared the quantitative tests.
  • Overall capital metrics remain robust. The aggregate CET1 capital ratio for the firms participating in the CCAR has more than doubled, from 4.9% in 1Q09 to 12.3% in 4Q18. This is expected to remain at current levels between 3Q19 and 2Q20, based on banks’ planned capital actions and earnings projections under their baseline scenarios. The Fed said that the largest and most complex banks have more than doubled their common equity capital from ~$300 billion to ~$800 billion during that time.
  • Other remarks from the Fed. The Fed observed that banks that are relatively new to the CCAR process exhibited varying degrees of weaknesses in stressed loss and revenue projections, especially in relation to their most significant risks and exposures. In a repeated comment from last year, it said that banks used certain large trading positions to offset the impact of market shocks on their stressed capital positions. However, it is concerned that these are not sound risk practices, as the effectiveness of such offsets in actual stressed markets are uncertain.
  • As expected, banks boost shareholder payouts. As anticipated, most banks increased their shareholder payouts. Capital One was the only one to maintain dividends, but it nearly doubled its buyback plan. Goldman Sachs (GS) and Morgan Stanley (MS) also announced higher capital returns after being partly constrained last year.
  • 2020 DFAST and CCAR: What to expect? Next year's tests are likely to incorporate an additional stressed capital buffer or a surcharge on the largest banks. Further, the number of participants will likely go up to 35 as another 17 banks are moved on to a bi-annual cycle.