“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 risk-weighted 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. 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.”
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