All 33 U.S. banks subject to the 2020 Federal Reserve stress tests met the standards to prove they would be able to retain enough capital to stay solvent through a deeper crisis, according to results released by the central bank last week. The Fed, however, said several banks came close to the minimum levels of cash reserves mandated under the Dodd-Frank Wall Street reform law, which was passed in the wake of the 2007-2009 financial crisis.
This year, the Fed tested banks on their ability to weather two hypothetical scenarios — a baseline of typical economic conditions and a “severely adverse scenario” — and three coronavirus-specific situations: a V-shaped recession and recovery; a slower, U-shaped recession and recovery; and a W-shaped, double-dip recession.
In response to its coronavirus sincerity analysis, the Fed is requiring all 33 banks to suspend third-quarter share repurchases, has capped their dividends, and also is requiring the banks to resubmit their capital plans to reflect coronavirus-related uncertainty. The revised capital plans will inform the Fed’s further assessment of the banks’ financial health and risks later in the year.
Additionally, because conditions are changing so quickly, the Fed plans to require banks to go through another round of stress testing with updated capital plans later this year.