Assessing Bank Resilience to a Funding Shock, Accessible Data

Figure 1. Varying Parameters of the Funding Shock Model

Figure 1 contains three line graphs. Each chart highlights the impact of varying one of three model parameters: the exponent (x), the share of repriced deposits (sh), or the MACET1 ratio threshold at which uninsured deposit repricing begins. Each chart shows the funding cost on the y-axis and the MACET1 ratio on the x-axis.

The left chart varies the exponent (x). When x is zero (solid black line) all bank deposits are repriced to the repricing rate (3-month Treasury yield + a 50 basis point spread) once they cross the MACET1 ratio threshold of 7 percent (all banks with MACET1 ratios above 7 are unaffected). When x is one (dashed black line), funding costs increase linearly as MACET1 ratios fall to 2.5 percent, at which point all uninsured deposits reprice to the repricing rate. When x is 2 (dotted black line) the repricing rate increases convexly as MACET1 fall to 2.5 percent, at which point all uninsured deposits reprice.

The middle chart demonstrates the effect of varying the maximum share of deposits that gets repriced. The three share values shown are 1.0 (solid black line), 0.8 (dashed black line), and 0.6 (dotted black line). When Sh is 1, all deposits reprice as MACET1 ratios decline and total funding costs rise to about 2.5 percent. By contrast, when Sh is 0.6, the composite funding costs rise to just under 2.0 percent.

Finally, the right-most chart illustrates the effect of varying the upper MACET1 ratio threshold at which uninsured deposits start repricing. As the upper threshold is raised, an increasing number of banks are exposed to higher uninsured deposit costs. The three upper MACET1 threshold values shown are 5.0 percent (solid black line), 7.0 percent (dashed black line), and 9.0 percent (dotted black line). The lower MACET1 threshold at which all uninsured deposits reprice is fixed at 2.5 percent in all examples. At 9.0 percent, the incremental impact of the funding shock is gradual as funding costs slowly climb toward 2.5 percent while MACET1 ratios decline. At an upper MACET1 ratio threshold of 5.0 percent and lower MACET1 ratio threshold of 2.5 percent, firms face more acute deposit repricing pressure and funding costs increase exponentially toward 2.5 percent.

Notes: Parameter values for illustration unless indicated otherwise: $$CUT^{up} = 7; CUT^{low} = 2.5; x=1; S^h = 1; S^l = 0; RR=$$ 3-month Treasury yield +50 bps; 3-month Treasury yield = 4.25 percent; $$UI$$ = 0.4.

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Figure 2. Unemployment Rate and 10-year Treasury Yield

Figure 2 shows two line graphs depicting the unemployment rate (left) and 10-Year Treasury yield (right) from 2023:Q1 through 2027:Q1. The actual variable path and the baseline scenario is depicted with a solid black line. The stagflation with severe recession (dotted red) and severely adverse (dashed blue) scenarios are illustrated from the 2024:Q4 jump-off point (marked by a vertical dashed line). After this point, both stress test scenarios show the unemployment rate rising to approximately 10 percent compared to a more benign level of 4 percent in the baseline scenario. In the stagflation scenario, the 10-year Treasury yield increases to approximately 5 percent. It drops sharply to about 1 percent in the severely adverse scenario, well below the baseline level of about 4 percent yield.

Source: Federal Reserve, Annual Stress Test Scenarios (https://www.federalreserve.gov/supervisionreg/dfa-stress-tests-2024.htm)

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Figure 3. Banking System Net Interest Margin and Return on Assets

Figure 3 includes two line graphs. The graph on the left shows average net interest margin by scenario and graph on the right average return on assets. In both graphs, the actual series and the baseline scenario are depicted with a solid black line. The stagflation without funding shock (dashed blue line) and stagflation with funding shock (dotted red line) scenarios are illustrated from the 2024:Q4 jump-off point (marked by a vertical dashed line).

Projected average net interest margins (left) increase in all scenarios. Actual NIMs were about 2.6 percent during 2024:Q4. They increase to about 3.0 percent during the first year of the projection horizon in the stagflation scenario without the funding shock, compared to about 2.8 percent in the other scenarios. The gap between the stagflation scenarios highlights the interest expense impact of the funding shock. NIMs increase mildly in the baseline scenario for remainder of the projection period, while NIMs continue to expand in the stagflation scenarios reaching a level of about 3.3 percent. The gap between to the two stagflation scenarios shrinks to about 10 basis points by 2027:Q1.

Average return on assets (right) remains stable in the baseline scenario at around 1 percent. In both stagflation scenarios, ROA drops sharply to about zero in 2025:Q1, before gradually recovering in the stagflation scenarios. The recovery is weaker in the stagflation scenario with the funding shock, as ROA reaches roughly 0.6 percent, which is roughly 10 basis points lower than the same scenario without the funding shock.

Source: FR Y-9C, Call Reports, Federal Reserve, Annual Stress Test Scenarios. (https://www.federalreserve.gov/supervisionreg/dfa-stress-tests-2024.htm)

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Figure 4. CET1 Ratios Under Three Hypothetical Scenarios

Figure 4 is a line graph showing the average common equity tier 1 (CET1) ratio for banks from 2023:Q1 to 2027:Q1. CET1 actuals and projections in the baseline scenario are shown with a solid black line. The stagflation without funding shock (dashed blue line) and stagflation with funding shock (dotted red line) paths are illustrated from the 2024:Q4 jump-off point (marked by a vertical dashed line).

Actual CET1 ratios at jump-off are about 13.1 percent and decline to about 12.9 percent in the first projection period of the baseline scenario, where they stay for the remainder of the scenario. In the stagflation scenarios, CET1 ratios decline to roughly 12.6 percent. The stagflation with funding shock scenario results in slightly lower CET1 ratios than the stagflation without funding shock scenario.

Note: We assume banks target capital levels equal to the 4-quarter average of their CET1 ratios. CET1 ratios decline across all scenarios during the first projection period as any capital in excess of the firm’s target CET1 ratio is paid out at that time.

Source: FR Y-9C, Call Reports, Federal Reserve, Annual Stress Test Scenarios. (https://www.federalreserve.gov/supervisionreg/dfa-stress-tests-2024.htm)

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Figure 5. MACET1 Ratios Under Three Hypothetical Scenarios

Figure 5 shows the post-stress distribution of minimum MACET1 ratio across banks. The baseline is shown with a solid black line. The post-stress distributions of the stagflation scenario without the funding shock is shown with a dashed blue line and post-stress minimums in the stagflation scenario with the funding shock are depicted with a dotted red line. Under the stagflation scenario without the funding shock, the post-stress distribution of MACET1 ratios shifts left and a large number of firms fall below 2.5 percent. The funding shock then pushes the MACET1 ratio distribution further to the left, as demonstrated by a growing number of firms with post-stress ratios less than zero.

Note: The right-most dashed vertical line denotes the threshold at which uninsured deposits start to reprice in the funding shock. The left-most dashed vertical lines denote the threshold at which a bank’s entire uninsured deposit base reprices to the 3-month Treasury yield plus the 50 basis points spread.

Source: FR Y-9C, Call Reports, S&P Capital IQ Pro, FR Y-14Q, Schedule B, FR Y-14Q, Schedule G, Federal Reserve, Annual Stress Test Scenarios. (https://www.federalreserve.gov/supervisionreg/dfa-stress-tests-2024.htm)

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Figure 6. Impacts of Varying the Repricing Rate

Figure 6 shows the impact of increasing the repricing rate (3-month Treasury yield + 50 basis point spread) on banking system minimum CET1 and MACET1 ratios (right) in the stagflation (dotted red line) and the severely adverse (dashed blue line) scenarios.

Post-stress minimum CET1 ratios in the severely adverse scenario stay around 12 percent as the repricing rate increases from 0 basis points to 500 basis points. The post-stress minimum CET1 ratio in the stagflation scenario without a repricing rate is about 12.8 percent and declines concavely toward 11 percent as the repricing rate increases to 500 basis points.

Post-stress minimum MACET1 ratios in the severely adverse scenario stay around 10 percent as the repricing rate increases from 0 basis points to 500 basis points. The post-stress minimum MACET1 ratio in the stagflation scenario without a repricing rate is about 8.5 percent and declines concavely toward 7 percent as the repricing rate increases to 500 basis points.

Source: FR Y-9C, Call Reports, S&P Capital IQ Pro, FR Y-14Q, Schedule B, FR Y-14Q, Schedule G, Federal Reserve, Annual Stress Test Scenarios. (https://www.federalreserve.gov/supervisionreg/dfa-stress-tests-2024.htm)

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Figure 7. Impacts of Varying the MACET1 Ratio Threshold

Figure 7 shows the impact of increasing the upper MACET1 threshold on banking system minimum CET1 (left chart) and MACET1 ratios (right chart) in the stagflation (dotted red line) and the severely adverse (dashed blue line) scenarios.

Post-stress minimum CET1 ratios in the severely adverse scenario stay around 12 percent as the upper MACET1 ratio threshold increases from 7 percent to 12 percent. The post-stress minimum CET1 ratio in the stagflation scenario starts at about 12.8 percent when the threshold is 7 percent and declines linearly toward 12 percent as the threshold increases to 12 percent.

Post-stress minimum MACET1 ratios in the severely adverse scenario stay around 10 percent as the upper MACET1 threshold increases from 7 percent to 12 percent. The post-stress minimum MACET1 ratio in the stagflation scenario is about 8.5 percent when the threshold is and declines linearly toward 8 percent as the threshold increases to 12 percent.

Source: FR Y-9C, Call Reports, S&P Capital IQ Pro, FR Y-14Q, Schedule B, FR Y-14Q, Schedule G, Federal Reserve, Annual Stress Test Scenarios.

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Figure A1. Banking System Common Equity Tier 1 (CET1) Ratios

Figure A1 is a line graph showing the average common equity tier 1 (CET1) ratio for banks from 2023:Q1 to 2027:Q1. Actuals and the baseline scenario are shown with a solid black line. The severely adverse without funding shock (dashed blue line) and severely adverse with funding shock (dotted red line) scenarios are illustrated from the 2024:Q4 jump-off point (marked by a vertical dashed line).

During 2024:Q4, aggregate CET1 ratios are about 13.1 percent. In the baseline scenario, the aggregate declines to about 12.8 percent in the next qurater, where it remains for the remainder of the scenario. Capital declines linearly toward 11.8 percent in both severely adverse scenarios, demonstrating that the funding shock has little or no effect when yields decline.

Source: FR Y-9C, Call Reports, Federal Reserve, Annual Stress Test Scenarios. (https://www.federalreserve.gov/supervisionreg/dfa-stress-tests-2024.htm)

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Figure A2. Market-Adjusted Common Equity Tier 1 (MACET1) Ratios

Figure A2 shows the post-stress distribution of minimum MACET1 ratios across banks in the baseline (black line) and severely adverse scenarios. The severely adverse without funding shock is shown with a dashed blue line and the severely adverse scenario with the funding shock is depicted with a dotted red line. Under the severely adverse scenarios, MACET1 ratios shift to the right relative to baseline, demonstrating that decreases in yields increase the fair value of banks’ assets and thus improve capital on a market-adjusted basis. The severely adverse post-stress minimums with and without the funding shock are virtually identical, demonstrating that the funding shock has little or no effect when yields decline.

Source: FR Y-9C, Call Reports, S&P Capital IQ Pro, FR Y-14Q, Schedule B, FR Y-14Q, Schedule G, Federal Reserve, Annual Stress Test Scenarios. (https://www.federalreserve.gov/supervisionreg/dfa-stress-tests-2024.htm)

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Last Update: February 17, 2026