How Bank of America, Wells Fargo and Truist fared in Federal Reserve's stress tests

All 23 of the biggest U.S. lenders passed the latest round of the Federal Reserve’s stress testing, including Charlotte’s three largest banks: Bank of America Corp., Truist Financial Corp. and Wells Fargo & Co. The results illustrated that big banks can weather a severe recession and continue lending to households and businesses, the Fed said in a news release yesterday.

The Dodd-Frank Act Stress Test, established in the wake of the 2008 financial crisis, assesses whether lenders have enough capital to withstand an economic downturn. The banks’ resiliency is evaluated by estimating their capital levels, losses, revenue and expenses under hypothetical scenarios over nine future quarters. Smaller and less complex banks were not tested in this round.

The Fed's scenario to test the banks included a "severe global recession" with the U.S. unemployment rate jumping to 10% and commercial real estate prices dropping by about 40%. A significant rise in office vacancies and a 38% decline in home prices were other factors considered.

Under this type of duress, the 23 tested banks were projected to face $541 billion in total losses while continuing to lend, according to the Fed's data. That total was driven by about $424 billion in estimated loan losses.

Charlotte-based Bank of America (NYSE: BAC) saw the biggest projected loan losses compared to Truist and Wells Fargo. BofA’s total loan losses came to $54.4 billion at a loss rate of 5.1% over the nine-quarter period. Commercial and industrial loans took the largest hit at $16.6 billion, followed by credit cards at $14.9 billion.

San Francisco-based Wells Fargo (NYSE: WFC), Charlotte’s third-largest bank, wasn’t far behind BofA with projected total loan losses of $54.2 billion at a loss rate of 5.7%. Of that, commercial real estate loans took the biggest hit at $13.6 billion, followed by commercial and industrial at $12.7 billion.

Charlotte’s Truist (NYSE: TFC) had total loan losses projected much lower than its local peers at $19.1 billion. In that category, commercial real estate took the hardest hit with a $5.1 billion loss. That’s followed by “other consumer” loans with a loss of $5 billion.

This year's stress test comes after banks have been the spotlight of increased scrutiny following the failures of three mid-sized banks earlier this year. And although the stress test signaled positive results, increased regulation for regional banks in light of the recent collapses is expected in the coming months. As a result, capital return programs may be prolonged until more information is known about the regulatory changes.

"Today's results confirm that the banking system remains strong and resilient," Michael S. Barr, vice chair for supervision at the Fed, said in a statement. "At the same time, this stress test is only one way to measure that strength. We should remain humble about how risks can arise and continue our work to ensure that banks are resilient to a range of economic scenarios, market shocks, and other stresses."

There are no regulatory consequences if a bank performs poorly in the stress-test scenario. However, it does alert regulators to when a bank falls below minimum capital levels.

In essence, the stress test results show how much capital banks can return to shareholders through dividends and common stock buybacks. Banks are expected to announce their updated plans for dividends and buybacks on Friday after the close of regular trading. It is projected that banks will likely be cautious with their capital plans.