“Stress tests” are upcoming for covered institutions, and the regulator of national banks and the Federal Reserve released resources for dealing with the tests late Thursday.
The Fed released the hypothetical scenarios for its annual supervisory bank stress tests, which it said help ensure that large banks lend to households and businesses even in a severe recession.
The agency said that this year 34 large banks will be tested against a severe global recession with heightened stress in commercial real estate and corporate debt markets. In addition, banks with large trading operations will be tested against a global market shock component that primarily stresses their trading positions; banks with substantial trading or custodial operations will be tested against the default of their largest counterparty.
“The Board’s stress tests evaluate the resilience of large banks by estimating losses, net revenue, and capital levels—which provide a cushion against losses—under hypothetical recession scenarios that extend more than two years into the future,” the Fed noted, adding that “the scenarios are not forecasts.”
Under this year’s test scenario, the U.S. unemployment rate rises 5.75% to a peak of 10% over two years, the Fed said. The jobless rate increase is accompanied by a 40% decline in commercial real estate prices, widening corporate bond spreads, and a collapse in asset prices, including increased market volatility.
In addition to the hypothetical scenario, banks with large trading operations will be tested against a global market shock component that primarily stresses their trading positions, the Fed added. “Moreover, banks with substantial trading or custodial operations will be tested against the default of their largest counterparty.”
Meanwhile, the Office of the Comptroller of the Currency (OCC) Thursday released economic and financial market scenarios for use in banks’ company-run stress tests. The scenarios, the agency said, include baseline and severely adverse scenarios, in keeping with its rules. Among other things, those rules require the agency provide scenarios to covered institutions by Feb. 15.