Fed, OCC release 2023 hypothetical stress-test scenarios

The hypothetical scenarios to be used in this year’s federal regulator and company-run bank stress tests were released Thursday afternoon by the Federal Reserve Board and the Office of the Comptroller of the Currency (OCC).

This year’s tests will include baseline and severely adverse scenarios, the agencies said.

The Fed said it will test 23 banks against a several global recession with heightened stress in both commercial and residential real estate markets, and corporate debt markets. The test scenarios will begin the first quarter of 2023 and continue through the first quarter of 2026, it said. It also reminded that the scenarios are hypothetical only and not forecasts.

“The Board’s stress test evaluates 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 two years into the future,” the Fed said. “The scenarios are not forecasts and should not be interpreted as predictions of future economic conditions.”

The Fed said banks with large trading operations will be tested also against a global market shock component that primarily stresses their trading positions. This component is a set of hypothetical shocks to a large set of risk factors reflecting market distress and heightened uncertainty. It said the 2023 stress test, for the first time, also will feature an additional exploratory market shock to the trading books of the largest and most complex banks, with firm-specific results released.

“This exploratory market shock will not contribute to the capital requirements set by this year’s stress test and it will be used to expand the Board’s understanding of the largest banks’ resilience by considering more than a single hypothetical stress event,” the Fed said in its release. “The Board also will use the results of the exploratory market shock to assess the potential of multiple scenarios to capture a wider array of risks in future stress test exercises.”

The OCC said results of the company-run stress tests provide the OCC with forward-looking information used in bank supervision and assist the agency in assessing a covered institution’s risk profile and capital adequacy.

The OCC’s website shows that covered institutions have until April 5 to submit the results of their company-run stress tests to the agency and must publish a summary of their results between June 15 and July 15. Where a parent company is also subject to this year’s supervisory stress test by the Fed, it may not publish its results summary earlier than the date the Fed Board publishes supervisory stress test results for that firm, it notes.

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