Scenarios that banks, holding companies and supervisors will use for the 2019 comprehensive capital analysis and review (CCAR) and Dodd-Frank Act stress-test exercises were released Tuesday by the Federal Reserve Board and Office of the Comptroller of the Currency (OCC).
The stress tests apply to banking organizations with more than $100 billion in total consolidated assets; CCAR evaluates capital planning processes and capital adequacy of the largest U.S. bank holding companies and large U.S. operations of foreign firms.
Scenarios for the 2019 stress tests are baseline, adverse, and severely adverse. The baseline scenario features a moderate economic expansion through the scenario period. The adverse scenario, features a moderate recession in the United States, as well as weakening economic activity across all countries included in the scenario. The severely adverse scenario features a severe global recession in which the U.S. unemployment rate rises by more than 6 percentage points to 10%; with elevated stress in corporate loan and commercial real estate markets.
The Fed said the adverse and severely adverse scenarios describe hypothetical sets of events (not forecasts) designed to assess the strength of banking organizations and their resilience, and the baseline scenario is in line with average projections from surveys of economic forecasters. “It does not represent the forecast of the Federal Reserve,” it said.
Each scenario includes 28 variables – such as gross domestic product, the unemployment rate, stock market prices, and interest rates – covering domestic and international economic activity. Along with the variables, the Fed Board is publishing a narrative description of the scenarios that also highlights changes from last year.
Also Tuesday, the Fed release a set of changes intended to bring more transparency to the stress testing program. (See story.)