by Calculated Risk on 3/20/2014 09:04:00 PM

Note: I was strong early supporter of bank stress tests, and I'm glad the Fed has continued testing banks on an annual basis. Hopefully this will continue ...

From the Federal Reserve: Press Release

According to the summary results of bank stress tests announced by the Federal Reserve on Thursday, the largest banking institutions in the United States are collectively better positioned to continue to lend to households and businesses and to meet their financial commitments in an extremely severe economic downturn than they were five years ago. This result reflects continued broad improvement in their capital positions since the financial crisis.

Reflecting the severity of the most extreme stress scenario--which features a deep recession with a sharp rise in the unemployment rate, a drop in equity prices of nearly 50 percent, and a decline in house prices to levels last seen in 2001--projected loan losses at the 30 bank holding companies in the latest stress tests would total $366 billion during the nine quarters of the hypothetical stress scenario. The aggregate tier 1 common capital ratio, which compares high-quality capital to risk-weighted assets, would fall from an actual 11.5 percent in the third quarter of 2013 to the minimum level of 7.6 percent in the hypothetical stress scenario. That minimum post-stress number is significantly higher than the 30 firms' actual tier 1 common ratio of 5.5 percent measured in the beginning of 2009.

From the WSJ: Fed 'Stress Test' Results: 29 of 30 Big Banks Could Weather Big Shock

The Fed said 29 of the 30 largest institutions have enough capital to continue lending even when faced with a hypothetical jolt to the U.S. economy lasting into 2015, including a severe drop in housing prices and a spike in the unemployment rate.

The results will factor into the Fed's decision next week to approve or deny individual banks' plans for returning billions of dollars to shareholders through dividends or share buybacks. The Fed's annual "stress tests" are designed to ensure large banks can withstand severe losses without needing a government rescue.