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Press Release
March 20, 2014

Federal Reserve releases summary results of
bank stress tests
For immediate release
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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 riskweighted 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.
Capital is important to banking organizations, the financial system, and
the economy broadly because it acts as a cushion to absorb losses and
helps to ensure that losses are borne by shareholders, not taxpayers.

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The Federal Reserve's stress scenario estimates are the outcome of
deliberately stringent and conservative assessments under hypothetical
economic and financial market conditions and the results are not
forecasts or expected outcomes.
"The annual stress test is one of the Federal Reserve's most important
tools to gauge the resiliency of the financial sector and to help ensure
that the largest firms have strong capital positions," Federal Reserve
Governor Daniel K. Tarullo said. "Each year we are making substantial
improvements, which have helped make the process even stronger than
when we first conducted the stress tests in the midst of the financial
crisis five years ago."
This is the fourth round of stress tests led by the Federal Reserve since
the tests in 2009 and is the second year that the Federal Reserve has
conducted stress tests pursuant to the Dodd-Frank Wall Street Reform
and Consumer Protection Act. The changes to the tests this year are as
follows:
In addition to the 18 institutions that have been part of the stress
tests since 2009, an additional 12 firms with assets greater than
$50 billion were included this year;
The Federal Reserve used independent projections of balance
sheet and risk-weighted asset growth rather than depending on
the firms' calculation for these categories as was done in prior
years, improving the comparability and robustness of the results;
The tests included an estimate of losses that could result if a
financial institution's largest counterparty were to default
unexpectedly. This scenario was applied to eight firms with
substantial trading or custodial operations. The counterparty
default scenario is part of the global trading shock, which is
applied to six firms with large trading operations; and
The Federal Reserve in this year's test began to phase in the
revised capital framework approved by the Board in July 2013.
The Federal Reserve calculated each firm's capital ratios in
accordance with the capital requirements that will be in effect
during each projected quarter.
In addition to releasing results under the severely adverse hypothetical
scenario, the Federal Reserve also on Thursday released results from
the adverse scenario, which features a more moderate recession than
that seen in the severely adverse scenario, but includes a steep rise in
long-term interest rates. In the adverse scenario, the aggregate tier 1
common capital ratio would fall from an actual 11.5 percent in the third
quarter of 2013 to the minimum level of 9.7 percent in the hypothetical
stress scenario.
The quantitative results from both the adverse and the severely adverse
scenarios in the supervisory stress tests are only one component in the
Federal Reserve's analysis during the Comprehensive Capital Analysis
and Review (CCAR). CCAR is an annual exercise in which the Federal
Reserve evaluates the capital planning processes and capital adequacy
at the largest financial institutions. The latest CCAR results will be

released on Wednesday, March 26, at 4 p.m. EDT. It is important to note
that capital plans of firms in CCAR have been objected to on qualitative
grounds even when capital ratios have exceeded all minimum poststress capital requirements.
Dodd-Frank Act Stress Test 2014: Supervisory Stress Test Methodology
and Results (PDF)
For media inquiries, call 202-452-2955.

Last Update: March 20, 2014

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