Background
The results of the 2023 stress test include information for each bank, such as capital ratios, pre-tax net income, losses, revenues, and expenses, projected under severely adverse economic and financial conditions.
Stress Test Process
The Federal Reserve projects these stress test results using a set of supervisory models that take as inputs bank-provided data on their financial conditions and risk characteristics, as well as the Federal Reserve's scenarios. The stress test uses models developed or selected by the Federal Reserve, which may be refined each year in advance of the stress test, and these models use bank-provided data collected primarily through regulatory reporting.3 This year, the supervisory severely adverse scenario is characterized by a severe global recession accompanied by a period of heightened stress in commercial and residential real estate, as well as corporate debt markets.4
Box 1. Model Changes since 2022 Stress Test
Each year, the Federal Reserve refines both the substance and process of the stress test, including its development and enhancement of independent supervisory models. The supervisory stress test models may be enhanced to reflect advances in modeling techniques; enhancements in response to model validation findings; incorporation of richer and more detailed data; and identification of more stable models or models with improved performance, particularly under stressful economic conditions. Each year, the Federal Reserve also makes relatively minor refinements, if necessary, to models that may include re-estimation with new data, re-specification based on performance testing, and other refinements to the code used to produce supervisory projections.
For the 2023 stress test, the Federal Reserve made four notable updates to the supervisory models: 1
- The international other consumer, international small-business, international first mortgage, and international home-equity portfolios, which are components of the other retail loans model, will be assigned loss rates associated with a percentile of the historical loss distribution. Under the supervisory severely adverse scenario, this percentile is related to the frequency of severe recessions.
- The commercial real estate loss given default (LGD) model was updated to make it more risk sensitive to loan-specific variation in the collateral value of a firm's outstanding commitments. The updated model directly recognizes the impact of granular differences in collateral value on recoveries for defaulted loans.
- The pre-provision net revenue (PPNR) model was updated to capture trading revenues based on FR Y-9C and FR Y-14 data. In prior exercises, trading revenues for these firms were modeled in the aggregate and allocated to each firm based on its market share.
- Intermediate holding companies, which became subject to the stress test in 2018, now have sufficient PPNR data history to be modeled individually and will no longer be modeled based on industry aggregate performance.2
In addition, in recent cycles, an adjustment was made to the Trading model for affordable housing public welfare investments. Due to recent revisions to the data collected on the FR Y-14Q report, this adjustment is no longer necessary.
1. Other than the revisions to the other retail loans model, the results for the 2023 stress test for the other revisions listed in this section will reflect the average output from the 2022 and 2023 models, in accordance with the stress test policy on averaging material model changes. Return to text
2. See page 76 of the 2018 stress test results for a description of the industry model: Dodd-Frank Act Stress Test 2018: Supervisory Stress Test Methodology and Results (Washington, Board of Governors, June 2018), https://www.federalreserve.gov/publications/files/2018-dfast-methodology-results-20180621.pdf. Return to text
Participating Banks
A total of 23 banks are participating in this year's stress test.5 Figure 3 shows when different types of banks are required to participate in the stress test, and table 2 lists participating banks. In 2022, 33 banks participated in the stress test because Category IV banks are generally required to participate in the test only every other year.6 Therefore, the aggregate results reported for the 2023 stress test are not fully comparable with the 2022 stress test results.
Figure 3. When bank holding companies are required to participate in the stress test
The Board conducts stress tests of bank holding companies it supervises on an annual or two-year cycle. Based on a bank holding company's financial condition, size, complexity, risk profile, risks to the U.S. economy, or scope of operations or activities, the Board may conduct a stress test of a bank holding company more or less frequently than required.
Table 2. Banks participating in the 2023 stress test
| Name | Risk based category |
|---|---|
| Bank of America Corporation | Category I |
| The Bank of New York Mellon Corporation | Category I |
| Barclays US LLC | Category III |
| BMO Financial Corp. | Category IV |
| Capital One Financial Corporation | Category III |
| The Charles Schwab Corporation | Category III |
| Citigroup Inc. | Category I |
| Citizens Financial Group, Inc. | Category IV |
| Credit Suisse Holdings (USA), Inc. | Category III |
| DB USA Corporation | Category III |
| The Goldman Sachs Group, Inc. | Category I |
| JPMorgan Chase & Co. | Category I |
| M&T Bank Corporation | Category IV |
| Morgan Stanley | Category I |
| Northern Trust Corporation | Category II |
| The PNC Financial Services Group, Inc. | Category III |
| RBC US Group Holdings LLC | Category IV |
| State Street Corporation | Category I |
| TD Group US Holdings LLC | Category III |
| Truist Financial Corporation | Category III |
| UBS Americas Holding LLC | Category III |
| U.S. Bancorp | Category III |
| Wells Fargo & Company | Category I |
Note: BMO Financial Corp., Citizens Financial Group, Inc., M&T Bank Corporation, and RBC US Group Holdings LLC are on a two-year stress test cycle; therefore, they were included in last year's stress test and would normally be included next in 2024. In connection with their recent acquisitions, the Board required BMO Financial Corp., Citizens Financial Group, Inc., and M&T Bank Corporation to receive a new capital requirement this year based on the 2023 stress test. RBC US Group Holdings LLC elected to opt in to the 2023 stress test.
Source: Federal Reserve Supervision and Regulation Report, table A.1.
References
3. For more information on the models and bank-provided data, see Board of Governors of the Federal Reserve System, 2023 Supervisory Stress Test Methodology (Washington: Board of Governors, June 2023), https://www.federalreserve.gov/publications/files/2023-june-supervisory-stress-test-methodology.pdf. Return to text
4. For more information on the scenarios, see Board of Governors of the Federal Reserve System, 2023 Stress Test Scenarios (Washington: Board of Governors, February 2023), https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20230209a1.pdf. Return to text
5. The Federal Reserve expects banks to wait until after 4:30 p.m. EDT on Friday, June 30, 2023, to publicly disclose any information about their planned capital actions and stress capital buffer requirements. This will give all banks sufficient time to examine and understand their results. Return to text
6. On October 10, 2019, the Board finalized a rule amending its stress test rules to subject certain banks with total consolidated assets between $100 billion and $250 billion to the supervisory stress test requirements on a two-year cycle (Prudential Standards, 84 Fed. Reg. 59,032 (Nov. 1, 2019)). Because of this rule change, the number of banks in this year's stress test is different from the 33 banks that participated in last year's stress test. For more information on which banks participated in the 2022 stress test, see Board of Governors of the Federal Reserve System, Dodd-Frank Act Stress Test 2022: Supervisory Stress Test Results(Washington: Board of Governors, June 2022), https://www.federalreserve.gov/publications/files/2022-dfast-results-20220623.pdf. Return to text