The American subsidiaries of Switzerland's two globally systemic banks have passed the Federal Reserve's annual stress test. They are prepared for a possible crisis.
Even in the face of various harsh scenarios, UBS and Credit Suisse have demonstrated to the US Federal Reserve they are prepared to withstand those challenges, the Fed said in its wide-ranging annual stress test.
The tests are designed to ensure that banks in the U.S. can continue to operate under a wide variety of challenges, and are sufficiently capitalized.
UBS and Credit Suisse
At the end of the fourth quarter, Credit Suisse had a common equity tier 1 capital ratio (CET1) of 27.6. Under a «severely adverse scenario» the ending ratio is 27.5 with a minimum of 20.1 on projections running from the first quarter of this year through the first quarter of 2024.
Under the same scenario UBS, which had a CET1 ratio of 17.8 at the end of the fourth quarter, the Fed projects an ending ratio of 18.0 and a minimum of 15.5.
The median difference between the CET1 and the low reached under stress is 2.5 points, meaning UBS came in just below the median result. Credit Suisse, on the other hand, has a projected gap of 7.6, which is the highest among all the banks tested.
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, as finews.com reported.
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.
Overall Results
This year's stress test shows that large banks have enough capital to absorb 612 billion dollars in losses and still be able to lend to households and businesses under stressful conditions. This is due to the «substantial buildup» of capital since the 2007-2009 financial crisis, according to the Fed. Of that, 463 billion would come from loan losses, followed by 100 billion in trading and counterparty losses.
Both UBS and Credit Suisse have CET1 ratios above the overall aggregate of 12.4 seen at the end of the fourth quarter. Under the severely adverse scenario, this would fall to a low of 9.7 before recovering to 10.3 at the end of the projection horizon.
«This partly reflects that banks have reduced their allowances for credit losses as conditions have improved over the past year and, all else equal, smaller initial allowances result in larger post-stress capital declines,» the Fed observes.
Pandemic Provisions
For the most recent stress test, 34 banks were required to participate, compared to 23 in 2021. This is because the smallest banks subject to the test are required to do so only every two years, according to the Fed which added the caveat that the results for this year are not fully comparable to last year.
During the pandemic, banks built up their allowances in anticipation of potential losses. But as portfolio and economic conditions have improved over the past two years, allowances for credit losses declined significantly since their pandemic-era peak. Therefore lower starting allowances imply that banks have a smaller cushion to absorb losses, leading to lower pre-tax net income and larger capital declines under stress.
