Credit Suisse’s US operations passed the annual stress tests – even the «severely adverse» scenario – from US regulators.
Under the US stress test scenario, Swiss bank Credit Suisse’s estimated regulatory capital ratios remained solidly above minimum required levels, according to an assessment by the Federal Reserve.
The Fed conducts annual stress tests of how large banks would perform under hypothetical recessionary scenarios; the tests are a legacy of the global financial crisis when naive assumptions that large banks were «too big to fail» proved to be false under unexpectedly adverse conditions.
«Heightened Stress»
The 2022 stress test’s «severely adverse» scenario used a model of a severe global recession with a period of «heightened stress» in the commercial real estate and corporate debt markets, the Fed’s release said. Under the scenario, the US unemployment would rise to a peak of 10 percent in the third quarter of next year and would include a nearly 40 percent plunge in commercial real estate prices. In addition, banks with large trading operations were tested against a global market shock on their trading, private equity and other positions as well as the default of their largest counterparty, the Fed said.
Overall, the 2022 stress test found that large banks have enough capital to absorb more than $600 billion in losses and continue lending under stressful conditions, the Fed said.
«Severely Adverse»
In a separate statement, Credit Suisse said the severely adverse scenario – or a more adverse than expected economic downturn -- would result in its US operations’ common equity tier 1 capital ratio falling to a projected 14.7 percent by the first quarter of 2024, with capital depletion mainly due to pre-provision net revenue losses and trading and counterparty losses. The minimum regulatory level is 4.5 percent.
The Swiss bank projected the severely adverse scenario would result in pre-provision net revenue coming in at a loss of $4.6 billion, including losses from risk events, mortgage repurchases and other real estate costs.
Just Stressed
The Fed’s results for the stressed scenario estimated Credit Suisse’s common equity tier 1 capital ratio would fall to 27.5 percent, from its actual level of 27.6 percent in the fourth quarter of 2021, compared with a minimum level of 20.1 percent.
That compared with the aggregate for the 34 banks tested falling to 9.7 percent from the actual figure of 12.4 percent at the end of the fourth quarter, before rising to 10.3 percent at the end of the projection period, or the first quarter of 2024, the Fed’s release showed, noting the minimum regulatory level is 4.5 percent.
The Fed’s projections for a stressed scenario found Credit Suisse would likely have a loan portfolio loss rate of 1.4 percent, including a nearly 10 percent loss rate on US commercial real estate, a 7.3 percent loss rate on commercial and industrial loans, and a nearly 14 percent loss rate on «other consumer» loans, which include student and auto loans, the Fed said.
