Only a small proportion of US “community” banks do not hold enough capital to withstand a severe decline in house prices, a researcher from the Federal Reserve Bank of San Francisco finds.

Using a loss rate similar to the most severe scenario used in the Fed’s national stress test, Simon Kwan evaluates the capacity of community banks to withstand real estate credit losses. He uses bank data on their capital ratios to test the effects of a fall of 30% in house prices and 40% in commercial real