US Big Banks Survive the Fed’s CRE Shock Scenario

Article originally posted on Globe St. on July 2, 2024

The Fed’s annual stress test of the US banking system found that the largest US banks have enough capital to withstand severe economic and market turmoil – including any potential shock that a significant drop in commercial real estate values could deliver. Namely, the institutions survived a hypothetical 40% drop in values.

The 31 large banks tested showed they have sufficient capital to absorb nearly $685 billion in losses. The Fed also tested for a 36% decline in US home prices, a 55% drop in equity prices and an unemployment rate of 10%.

The commercial real estate component of the test had been closely monitored by the industry and regulators given the falling valuations, especially of office buildings, and elevated interest rates, which appear to  be in place for longer than expected. “Though this doesn’t mean the Fed thinks commercial real estate is out of the woods,” Chris Marinac, head of research at Janney Montgomery Scott told Reuters. “It’s still early innings in this credit cycle.”