You are Maya Lindqvist, a month into the job as Chief Financial Officer of Merrow Valley Bancorp, a regional bank headquartered in Columbus, Ohio. The Federal Reserve published its stress scenarios last week, and before the capital plan goes in on 5 April you must decide how the bank will project its losses on a $7.5 billion office loan book its models have never seen in a downturn.
The situation
It is Monday, 14 February 2028. Merrow Valley has $118 billion of assets, $78 billion of loans and $94 billion of deposits across Ohio, Indiana, Kentucky, Pennsylvania and Michigan. Being above $100 billion, it files a capital plan with the Fed every year, and this year it is also put through the Fed's supervisory stress test. The rule is simple to state: the Common Equity Tier 1 (CET1) ratio, common equity divided by risk-weighted assets, must stay above 4.5% plus a stress capital buffer the Fed computes with its own models — the fall in the ratio it projects under its severely adverse scenario, plus a year of planned dividends, and never less than 2.5%. The Fed publishes the buffers in late June; they apply from 1 October.
CET1 stands at 10.27% today: $9.45 billion of capital against $92 billion of risk-weighted assets. In this year's severe scenario unemployment rises to about 10% and commercial real estate prices fall by about 40%. The book holds $7.5 billion of office loans, much of it refinancing in 2028 and 2029. The bank's loss models, estimated on 2010–2019 data, project 7% losses on that book over the scenario's nine quarters. Priya Raman, who runs model risk management, has written in the margin of the draft that the office model has never seen an office downturn.
The file on the last cycle is on your desk. In 2026 the bank's own projection pointed to the 2.5% floor; the Fed, running its models on the same balance sheet, set 3.4%. Supervisors also issued a formal finding because the bank's own scenario had not stressed the office book. And in November Thomas Harrigan, the CEO, told investors the dividend would rise by 20% and the bank would buy back $1.6 billion of stock over the following year. The board discusses the plan on 27 March.