The Federal Reserve System conducted its annual supervisory stress test to measure the financial resilience of banks under hypothetical economic conditions. This is to ensure that large banks possess ample capital to sustain lending to households and businesses even in a severe recession. The results were released last June.
Key Points:
- The test measures the ability of banks to continue lending during stressful conditions.
- The stress test demonstrates resilient capital levels of 23 large banks.
- Projected losses and operational-risk expenses for banks are revealed in the test.
The 2023 Stress Test results prove that the 23 large banks are reliable enough to support the economy when recession happens. The test also shows the potential operational risk expenses and projected losses for banks.
Here are some quotations from the report:
“The 2023 stress test shows that the 23 large banks subject to the test this year have sufficient capital to absorb more than $540 billion in losses and continue lending to households and businesses under stressful conditions. In the immediate years after the 2007–09 Global Financial Crisis, banks subject to the stress test substantially increased their capital, which has remained largely level for the past few years (see figure 2). The aggregate and individual bank post-stress common equity tier 1 (CET1) capital ratios remain well above the required minimum levels throughout the projection horizon.”
“While stress tests are one of many supervisory tools, they are the most risk-sensitive and dynamic component of the regulatory capital framework. They help ensure banks can withstand acute financial stress and still be able to lend to households and businesses. However, recent events have highlighted the need for humility when assessing large bank resilience. Stress tests should continue to evolve over time to reflect an appropriately wide range of risks in today’s complex and interconnected financial system. The exploratory analysis conducted this year demonstrates the capacity of supervisory stress testing to test for a wider range of risks and the value of doing so.”
The stress test results can influence various factors in the financial system, which can affect mortgage delinquency rates. With this, the U.S. delinquency rates remain close to historic lows, as can be seen in the image below. This is reflected across all loans and all commercial banks.
Low delinquency rates suggest that most households and businesses are effectively managing their debts and are financially capable of meeting their obligations. In turn, it benefits the banks and financial institutions as low delinquency rates are associated with lower levels of credit risk.
Additionally, the latest CoreLogic Loan Performance Insights Report shows a consistent “near all-time low” in overall US delinquency rate, from September 2022 to September 2023. While most of the homeowners were able to pay their mortgages on time in September, it is also mentioned that there is a slight increase in the U.S. unemployment rate. Natural Disasters also have an impact on delinquency rates. Delinquency rates increased in Kahului-Wailuku-Lahaina metro after the hurricane-fuelled wildfires in Hawaii and Punta Gorda, Florida, and Cape Coral-Fort Myers, Florida after Hurricane Ian.
The delinquency rates for mortgages in the United States showed little to no changes compared to the previous year:
- Overall U.S. mortgage delinquency rate for both September 2022 and September 2023 is 2.8%, resulting in 0.0% year-over-year change.
- Early-stage delinquencies (30 to 59 days past due) increased to 1.5% from 1.2% in September 2022.
- Adverse delinquencies (60 to 89 days past due) remained unchanged at 0.4% compared to September 2022.
- Serious delinquencies (90 days or more past due, including loans in foreclosure) decreased to 0.9% from 1.2% in September 2022.
- The foreclosure inventory rate (the share of mortgages in the foreclosure process) remained unchanged at 0.3% from September 2022.
- The transition rate (the share of mortgages transitioning from current to 30 days past due) increased to 0.8% from 0.6% in September 2022.
The 2023 Stress Test Results and the Delinquency Rates from the Federal Reserve System, and the report from CoreLogic collectively give a positive insight about the United States financial landscape. The connection between the capabilities of lenders, particularly large banks, and the financial behaviour of loan takers contributes to the stability and resilience of the economy. Having a comprehensive understanding about these data and other related factors can be a reference to help individuals and businesses address existing or upcoming financial challenges.
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Photo credits: Board of Governors of the Federal Reserve System (US), Kubra Aydogan (Getty Images)