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Commentary

Banks Breeze Through Fed's Annual Stress Tests

Results of adverse scenarios are generally in line with Morningstar's own Stress Test analyses.

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Late on March 5, the Fed released the results from the supervisory stress tests conducted as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. This year, the stress test differed from prior years in that the Federal Reserve used two scenarios, "adverse" and the newly added "severely adverse" scenarios, with the latter characterized by a substantial global weakening in economic activity, including a severe U.S. recession, large reductions in asset prices, significant widening of corporate bond spreads, and a sharp increase in equity market volatility. All 31 of the banks subject to the stress test passed as the minimum of their Tier 1 common ratio stayed above 5% under both the severely adverse and adverse stress-case scenarios. The results are no surprise to us as they are generally in line with Morningstar's own Stress Test analyses.

The Fed noted in its press release that for all 31 banks as group, the cumulative loss rate for all accrual loan portfolios is 6.1% over a nine-quarter period, lower than the loss rate from the 2014 DFAST, or Dodd-Frank Act Stress Test. As stated in the Federal Reserve's press release, this reflects a "continuing a trend of declining loan loss rates under the severely adverse scenario over time, as borrower and loan characteristics have continued to improve."

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Dan Werner does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.