FED Releases Results of Second Round of Bank Stress Test for 2020
FED released results of the second round of bank stress test for 2020. The results of the December 2020 stress test show that firms maintain strong capital levels under two hypothetical severe scenarios. However, in light of the ongoing economic uncertainty and to preserve the strength of the banking sector, FED is extending the current restrictions on distributions, with modifications. For the first quarter of 2021, both dividends and share repurchases will be limited to an amount based on income over the past year. If a firm does not earn income, it will not be able to pay a dividend or make repurchases. Additionally, the capital requirements of firms will not be reset at this time.
Earlier this year, FED had conducted its annual stress test and additional analysis in light of the COVID-19 event. Those results found that banks generally had strong levels of capital, but considerable economic uncertainty remained. In response, FED had imposed several restrictions to ensure that banks would preserve capital, including suspending share repurchases and limiting dividends. With the restrictions in place, large banks have recently built capital, despite setting aside about USD 100 billion in loan loss reserves. Loan losses under the December stress test scenarios are higher compared to the June stress test scenario, but are lower than losses under the alternative downside scenarios in the sensitivity analysis, due to the higher severity of those scenarios. Aggregate projected loan losses under the alternative downside scenarios ranged from about USD 560 billion to just over USD 700 billion, compared to USD 514 billion and USD 491 billion under the severely adverse and alternative severe scenarios for the December stress test, respectively.