38 financial firms to participate in 2018 CCAR, under three scenarios

Scenarios that 38 financial firms and their supervisors will use this year for conducting comprehensive capital analysis and review (CCAR) and stress-test exercises were released Thursday by the Federal Reserve.

The Fed also said all of the institutions will be subject to the quantitative portion of CCAR; 18 of those – the largest and most complex – will also be subject to a qualitative evaluation of their capital planning capabilities. Those include five foreign firms with U.S. operations for the first time. The remaining 20 (including one foreign firm) are “less complex,” the Fed said.

Capital plans and stress testing results from the “firms participating” are due to the Federal Reserve by April 5, the Fed said; results will be announced by June 30 (an exact date to be announced later).

The 2018 cycle will apply three scenarios:

  • Severely adverse: characterized by a severe global recession in which the U.S. unemployment rate rises almost 6 percentage points to 10%, accompanied by a steepening Treasury yield curve.
  • Adverse: features a moderate recession in the United States, as well as weakening economic activity across all countries included in the scenario.
  • Baseline: in line with average projections from surveys of economic forecasters (not Federal Reserve forecasts, the central bank pointed out).

The Fed emphasized that adverse and severely adverse scenarios are not forecasts by the Fed; rather, they “describe hypothetical sets of events designed to assess the strength of banking organizations and their resilience.”

The agency said each scenario includes 28 variables — such as gross domestic product, unemployment rate, stock market prices, and interest rates — encompassing domestic and international economic activity. A narrative is also being published, the Fed said, that describes the general economic conditions in the scenarios and changes in the scenarios from the previous year.

“As in prior years, six bank holding companies with large trading operations will be required to factor in a global market shock as part of their scenarios,” the Fed stated in a release. “Eight firms with substantial trading or processing operations will also be required to incorporate a counterparty default scenario.”

The central bank said to support the transition to stress testing for foreign firms that are new to the evaluation, the U.S. operations of the six foreign firms will be subject to a simplified global market shock this year and the complete global market shock next year.

Federal Reserve Board releases scenarios for 2018 Comprehensive Capital Analysis and Review (CCAR) and Dodd-Frank Act stress test exercises and issues instructions to firms participating in CCAR