Board of Governors of the Federal Reserve System

Results for Banks under the Severely Adverse Scenario

This section contains the Federal Reserve's results for the 2023 stress test under the severely adverse scenario. The results are presented both in the aggregate and for individual banks.

The aggregate results incorporate the combined sensitivities of capital, losses, revenues, and expenses across all banks to the stressed economic and financial market conditions contained in the severely adverse scenario. The range of results across individual banks indicates differences in business focus, asset composition, revenue and expense sources, and portfolio risk characteristics. Boxes 2 through 4 contain additional information regarding key themes in this year's stress test. Box 2 contains additional insights about the results by placing them in context of results from recent years. A discussion of commercial real estate exposures in the 2023 test is highlighted in box 3. Box 4 contains a summary of the results and lessons learned from the additional, exploratory market shock applied to U.S. global systemically important banks (G-SIBs). The comprehensive 2023 stress test results for individual banks are in appendix A.

Capital

Under the severely adverse scenario, the aggregate CET1 capital ratio is projected to decline from 12.4 percent at the start of the projection horizon to a minimum of 9.9 percent before rising to 10.5 percent at the end of nine quarters (see table 3). Tables 4 and 5 present post-stress minimum capital ratios for each bank, and the change from the start of the projection horizon varies considerably across banks (see figure 4). This variation is due to differences in banks' business lines, portfolio composition, and securities and loan risk characteristics, which drive changes in the magnitude and timing of loss, revenue, and expense projections.

Table 3. Aggregate capital ratios and risk-weighted assets, actual 2022:Q4 and projected 2023:Q1–2025:Q1**

Table 4. Projected minimum common equity tier 1 capital ratio under the severely adverse scenario, 2023:Q1–2025:Q1: 23 banks**

Table 5. Capital ratios, actual 2022:Q4 and projected 2023:Q1–2025:Q1 under the severely adverse scenario: 23 banks**

Pre-tax Net Income

Projections of pre-tax net income are the largest component of post-stress changes in capital.⁷ Over the nine quarters of the projection horizon, aggregate cumulative pre-tax net income is projected to be negative $190 billion, which equals negative 1 percent of average total assets (see table 6). As a percent of average assets, projected cumulative pre-tax net income is negative for 20 out of 23 banks and varies considerably across banks, ranging from negative 5.7 percent to positive 1.9 percent (see figure 5 and table 7). This range illustrates differences in the sensitivity of the various components of pre-tax net income to the economic and financial market conditions in the severely adverse scenario. These components include cumulative projections of losses and pre-provision net revenue (PPNR), which are discussed in further detail below.

Table 6. Projected aggregate losses, revenue, and net income before taxes through 2025:Q1 under the severely adverse scenario**

Table 7. Projected losses, revenue, and net income before taxes through 2025:Q1 under the severely adverse scenario: 23 banks**

Losses

Over the projection horizon, aggregate losses on loans and other positions are projected to be $541 billion. These losses comprise

• $424 billion in loan losses, accounting for 78 percent of total losses;
• $18 billion in additional losses from items such as loans booked under the fair-value option (see table 6), accounting for 3 percent of total losses;
• $94 billion in trading and counterparty losses at the 11 banks with substantial trading, processing, or custodial operations, accounting for 17 percent of total losses; and
• $5 billion in securities losses, accounting for 1 percent of total losses (see figure 6).⁸

For loans measured at amortized cost, projected aggregate losses are $424 billion, with the loan loss rate at 6.4 percent (see table 8).⁹ These loan losses flow into pre-tax net income through the projection of provisions for loan and lease losses, which is $422 billion in aggregate and takes into account banks' established allowances for credit losses at the start of the projection horizon.¹⁰

Table 8. Projected aggregate loan losses, by type of loan, under the severely adverse scenario, 2023:Q1–2025:Q1

Projected consumer loan losses represent a smaller share (35 percent) of total losses than commercial loan losses (42 percent). The loan portfolio that constitutes the largest amount of losses is credit cards, representing 22 percent of total losses.

Total loan loss rates vary significantly across banks, ranging between 1.3 percent and 14.7 percent (see table 9). This range results from differences in loan portfolio composition, which materially affects losses because projected loss rates vary significantly for different types of loans. For example, aggregate loan loss rates range from 2.7 percent on domestic first-lien mortgages to 17.4 percent on credit cards, due to the sensitivity and historical performance of these loans. Some loan portfolios are sensitive to home prices or unemployment rates and may experience high stressed loss rates due to the considerable stress on these factors in the severely adverse scenario.¹¹

Loan loss rates also reflect differences in the characteristics of loans within each portfolio. For example, the median projected loss rate on commercial and industrial (C&I) loans across all banks is 6.3 percent. The loss rate on C&I loans among individual firms ranges from 2.5 percent to 16.6 percent. For credit cards, the range of projected loss rates among banks is 15.5 percent to 24.7 percent, and the median is 17.8 percent.

For loans measured at fair value, losses enter pre-tax net income through the other loans loss category (see table 7). Loans measured at amortized cost and those measured at fair value generally have similar risk factors, but the latter are exposed to risk from the effects of market fluctuations, which can lead to more severe market value losses in periods of high market volatility or asset illiquidity.

Aggregate trading and counterparty losses, which also flow into pre-tax net income, are $94 billion for the 11 banks subject to the global market shock component and/or the largest counterparty default component of the severely adverse scenario. Individual bank losses range from $1 billion to $21 billion, resulting from the specific risk characteristics of each bank's trading positions and counterparty exposures, inclusive of hedges (see table 7). Importantly, these projected losses are based on the trading positions and counterparty exposures held by banks on the same as-of date (October 14, 2022) and could have varied if they had been based on a different date.

Aggregate credit losses on investment securities are $5 billion (see table 6). In addition, unrealized gains and losses on available-for-sale (AFS) debt securities are reflected in accumulated other comprehensive income (AOCI).¹² Other comprehensive income (OCI) is projected to be $37 billion* in aggregate.

Table 9. Projected loan losses by type of loan for 2023:Q1–2025:Q1 under the severely adverse scenario: 23 banks

Pre-provision Net Revenue

Pre-tax net income also includes projections of post-stress income and expenses captured in PPNR. Over the projection horizon, banks are projected to generate an aggregate of $349 billion in PPNR, which is equal to 1.8 percent of their combined average assets (see table 6).

PPNR projections are generally driven by the shape of the yield curve, the path of asset prices, equity market volatility, and measures of economic activity in the severely adverse scenario. In addition, PPNR incorporates expenses stemming from operational-risk events, such as fraud, employee lawsuits, litigation-related expenses, or computer system or other operating disruptions.¹³ In the aggregate, operational-risk losses are $185 billion.

The ratio of PPNR to average assets varies across banks (see figure 7), primarily because of differences in business focus. For instance, the ratio of PPNR to assets tends to be higher at banks focusing on credit card lending, since credit cards generally produce higher net interest income relative to other forms of lending.¹⁴ Additionally, lower ratios of PPNR to assets do not necessarily imply lower pre-tax net income, because the same business focus and risk characteristics determining differences in PPNR across banks could also result in offsetting projected losses.

 

References

 

 7. For risk-based capital ratios, the numerator is capital, which is primarily impacted from pre-tax net income and gains/losses on AFS. The denominator for risk-based capital ratios is risk-weighted assets. Risk-weighted assets change minimally throughout the projection horizon as the result of an assumption that a bank's assets generally remain unchanged. Return to text

 8. For banks that have adopted ASU 2016-13, the Federal Reserve incorporated its projection of expected credit losses on securities in the allowance for credit losses, in accordance with Financial Accounting Standards Board (FASB), "Financial Instruments–Credit Losses (Topic 326)," FASB ASU 2016-13 (Norwalk, CT: FASB, June 2016). Prior to the adoption of ASU 2016-13, securities credit losses were realized through other-than-temporary impairment. Return to text

 9. The loss rate is calculated as total projected loan losses over the nine quarters of the projection horizon divided by average loan balances over the horizon. Return to text

 10. Provisions for loan and lease losses equal projected loan losses plus the amount needed for the allowance to be at an appropriate level at the end of each quarter. Return to text

 11. In addition, losses are calculated based on the exposure at default, which includes both outstanding balances and any additional drawdown of the credit line that occurs prior to default, while loss rates are calculated as a percentage of average outstanding balances over the projection horizon. Return to text

 12. Only firms subject to Category I or II standards or firms that opt in are required to include unrealized gains and losses on securities in the calculation of capital. Category III and IV firms are not required to include unrealized gains and losses on securities in the calculation of capital. Return to text

 13. These operational-risk expenses are not a supervisory estimate of banks' current or expected legal liability, as they are conditional on the severely adverse scenario and conservative assumptions, and they also incorporate the potential for substantial losses that do not involve litigation or legal exposure. Return to text

 14. Credit card lending also tends to generate relatively high loss rates, suggesting that the higher PPNR rates at these banks do not necessarily indicate higher profitability. Return to text

*The data point was revised.

**Note:The Federal Reserve revised this report on July 27, 2023, due to two banks, Bank of America Corporation and The Bank of New York Mellon Corporation, submitting incorrect data. The revisions from the incorrect submissions do not result in a change to either bank's stress capital buffer but do affect projected capital ratios. In its review of these banks' data, the Federal Reserve conducted reviews of the other banks that underwent the stress test and found no errors in their submissions.