The US subsidiaries of Deutsche Bank AG and UBS Group AG displayed the biggest blows to core capital ratios among the 23 banks in the Federal Reserve's annual stress tests.

The regulatory exercise gauging the resilience of the largest banks in the US included the local units of Deutsche Bank AG, UBS Group AG, Credit Suisse Group AG and Barclays PLC. All four subsidiaries of the European global systemically important banks showed high levels of capitalization with common equity Tier 1 (CET1) ratios above the sample's average of 12.4% as of Dec. 31, 2022.

Credit Suisse (USA) Inc. had the highest CET1 ratio in the sample at 27.8%, followed by Deutsche Bank's DB USA Corp. with 26.1%. UBS Americas Holding LLC and Barclays US LLC's CET1 ratios stood at 16.1% and 13.5%, respectively.

Although they are sizable, the CET1 ratios of the European banks' subsidiaries would drop by an average of 710 basis points in the Fed's severely adverse scenario, much deeper than the average 230 basis-point decline across all tested banks. The average capital hit for the four subsidiaries in 2023 is also much bigger than the 420 basis-point average drop they showed in the 2022 Fed tests.

The severely adverse scenario in 2023 assumes a "severe global recession accompanied by a period of heightened stress in both commercial and residential real estate markets, as well as in corporate debt markets," the Fed said. This year's tests measure the change in banks' performance over nine quarters — from the first three months of 2023 to the same period in 2025.

Capital crash

DB USA and UBS Americas booked the highest capital drawdowns among all tested banks, with projected CET1 ratio drops of 870 basis points and 810 basis points, respectively, in the adverse scenario.

The heavy capital hit is due to "a particularly high impact from noninterest expenses," which would account for 9.1% of Deutsche Bank's and 13.3% of UBS' assets in the adverse scenario, analysts at Morgan Stanley said in a June 28 note. Noninterest expenses include losses from operational risk events and other real estate owned, the analysts said.

As a whole, the US subsidiaries of European banks would have a big enough average capital cushion under the adverse scenario, with more than 900 basis points left above minimum CET1 requirements, the analysts said.

The results of the Fed stress test are unlikely to affect the European banks' dividend or share buyback plans as ultimately what matters is the excess capital at group level, the analysts noted.

– Access the Peer Analysis template on CapIQPro. – Read more about the Fed stress test.

Higher loss rates

All European bank subsidiaries showed weaker earnings power in an adverse scenario than the sample average. The pretax income rates came in negative for 20 of the 23 banks, with considerable differences in loss rates across the sample, the Fed said.

With 5.7%, Credit Suisse USA showed the highest loss rate of all banks in the tests. In comparison, UBS Americas' pretax loss rate in the adverse scenario would stand at 1.2%, the data shows.

Asset quality vulnerability

Barclays US showed the highest projected loan loss rate among the European banks and the second-highest rate in the overall sample, with cumulative loan losses expected to rise to 10% of total loans in the adverse scenario. This compares to an average loan loss rate of 6.4% for the whole sample and 6.2% across the European peer group.

Consumer product mix is the main driver of projected loan losses at Barclays US, the Morgan Staley analysts said. The bulk of projected losses is concentrated in the unit's credit card and other consumer loan portfolios, the Fed data shows.

Deutsche Bank showed particular vulnerability in commercial real estate (CRE) with a projected loss rate of 11% of sector loan book. The result is not surprising, given that 50% of Deutsche Bank's CRE portfolio is based in the US and 15% of the US portfolio is composed of office property loans, the Morgan Staley analysts noted.

The stress tests assumed a 40% drop in CRE prices, combined with a substantial rise in office vacancies, resulting in loss rates on office properties "that are roughly triple the levels reached during the 2008 financial crisis," the Fed said. The 23 institutions in the test account for about 20% of all office and downtown CRE loans held by banks in the US.