Bank stress test (CCAR).

In plain English

The Federal Reserve publishes scenarios with sharp jumps in unemployment and drops in asset prices, then projects each large bank's losses, revenue, and capital ratios over several quarters under those conditions. Banks submit their own data and capital plans, and the Fed runs its independent models against them. Results feed into how much capital each bank must hold above the minimum, which in turn limits dividends and share buybacks. The scenarios are deliberately harsh and are not forecasts of what the Fed expects. Summary results are published, so the public can see how each institution fared.

01Why it matters

The test decides how much capital a bank can return to shareholders versus how much it must keep as a cushion, which affects both bank stock investors and the safety of the deposits inside.

02The math, step by step

Say a bank starts with a 12 percent capital ratio. Under the severe scenario it takes $18 billion of loan losses against $150 billion of risk-weighted assets, a 12 point hit, offset by $9 billion of projected revenue. The ratio troughs near 6 percent, above a 4.5 percent minimum.

Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.

03What this is NOT

04Receipts

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