The Federal Reserve on Friday released hypothetical scenarios for 2021 bank stress tests under the Dodd-Frank Act, noting that stress tests are required of 19 large banks, with 14 others given until April 5 to opt into the stress testing if they wish to do so.
Those 14 banks are smaller institutions subject to less-stringent prudential standards than other banks (Category IV under the Fed’s 2019 “tailoring” rule) that are required to conduct stress testing every other year.
The stress tests are aimed at ensuring large banks are able to lend to households and businesses even in a severe recession. The Fed says the exercise evaluates the resilience of large banks by estimating their loan losses and capital levels under hypothetical recession scenarios that extend nine quarters into the future.
The hypothetical recession for this year’s test begins the first quarter of 2021 and features a severe global downturn with substantial stress in commercial real estate and corporate debt markets. In the “severely adverse” scenario, the U.S. unemployment rate rises by 4 percentage points from its starting point, reaching a peak of 10-3/4% in the third quarter of 2022. Gross domestic product (GDP) falls 4% from the fourth quarter of 2020 through the third quarter of 2022, with asset prices dropping sharply, including a 55% decline in equity prices.
In this year’s stress tests, the Fed said banks with large trading operations will be tested against a global market shock component that stresses their trading, private equity, and other fair value positions. It said banks with substantial trading or processing operations will be tested against the default of their largest counterparty.
The Fed noted that the scenarios are not forecasts, and the severely adverse scenario is significantly more severe than most current baseline projections for the path of the U.S. economy under the stress testing period. Each scenario includes 28 variables covering domestic and international economic activity.
The 19 banks required to participate in this year’s stress tests include:
- Bank of America Corporation;
- The Bank of New York Mellon Corporation;
- Barclays US LLC;
- Capital One Financial Corporation;
- Citigroup Inc.;
- Credit Suisse Holdings (USA), Inc.;
- DB USA Corporation;
- The Goldman Sachs Group, Inc.;
- HSBC North America Holdings Inc.;
- JPMorgan Chase & Co.;
- Morgan Stanley;
- Northern Trust Corporation;
- The PNC Financial Services Group, Inc.;
- State Street Corporation;
- TD Group US Holdings LLC;
- Truist Financial Corporation;
- UBS Americas Holding LLC;
- S. Bancorp;
- Wells Fargo & Company.
The Fed said that in addition to DB USA Corporation, DWS USA Corporation, a second U.S. intermediate holding company subsidiary of Deutsche Bank AG, is also subject to this year’s stress test.