June 30, 2023
Fortune recently published an article featuring Mark Williams, Master Lecturer of Finance, addressing the Federal Reserve Board’s annual Stress Test and its success.
Despite a hypothetical recession that would cause losses of $541 billion, the 23 largest U.S. banks remained above their minimum capital requirements, the results showed, but Williams made some reserves. While this is a good start, Vice Chair for supervision emphasizes that risks can arise at any time. The focus on small banks has become just as important since Silicon Valley Bank collapsed.
“It’s a positive sign that the big 23 banks passed the stress test. But this is just a stress test for the macroeconomy. And it wasn’t that the stress test gave a clean bill of health. [It] illuminated that commercial real estate risk within these big banks is significant. If we do go into recession, these 23 banks hold 20% of all commercial real estate and that’s offices, downtown buildings—that is a looming risk,” said Williams. In addition to market changes in interest rates, the Fed’s stress test also incorporated a recent statement by US Federal Reserve Chair, Jerome Powell, on Thursday. Powell said interest rates may be raised “two or more times by the end of the year.”