The U.S. banking sector is bracing for the 2024 stress test results, scheduled to be released Wednesday after the market closes. Bank of America analyst Ebrahim H. Poonawala expects this year’s stress test to show overall improved capital buffers compared to 2023, given the moderately better severely adverse scenario outlined by the Federal Reserve. Improved Capital Buffers Expected According to Poonawala, banks are entering the 2024 stress test with approximately 300 basis points (bp) of excess Common Equity Tier 1 (CET1) capital above regulatory minimums, a notable increase from around 185 bp last year. “Surprises from the annual stress test results are inevitable given the inherent opacity, but we expect these to be manageable,” Poonawala stated. The improved capital position would imply a better ability to absorb an increase in the stress capital buffer, which is a positive development as banks navigate real-life challenges posed by the current macroeconomic backdrop and changing regulatory attitudes. Bank Stress Test’s Severely Adverse Scenario The 2024 stress test’s four scenarios, designed to provide the Federal Reserve with insight into the resiliency of the U.S. banking system, focuses on funding stress and the failure of five large hedge funds. In the Fed’s hypothetical severely ...