DBRS Morningstar: Federal Reserve Stress Tests Again Highlight CRE Risk

This commentary reviews the Federal Reserve's annual stress test with a primary focus on commercial real estate (CRE).

Key highlights include:
•Positively, all 23 banks in this year's iteration cleared the Federal Reserve stress tests and would all be able to continue to lend supporting the economy.
•This year's stress test included heightened stress scenarios, especially around CRE. Next to credit cards, CRE had the highest loss levels of any asset class.
•Preliminary stress capital buffers (SCB) have been released by some banks ranging from 2.50%.to 5.5%.

“Overall, projected CRE loss rates remain elevated but have fallen since 2020 as the hospitality sector recovered from the acute pandemic-related stress. Projected loss rates in the office sector continue to increase because of the high level of vacancies and projected further deterioration under the stress test scenario,” said John Mackerey, Senior Vice President - North American Financial Institutions