Annual stress tests results will be released June 27, the Federal Reserve said Friday, adding that the document providing details about the models used in the test are now public.
This year’s stress tests covered 22 large banks. The scenario of the tests (outlined in the annual stress test methodology document released Friday) includes a severe global recession with heightened stress in both commercial and residential real estate markets, as well as in corporate debt markets, the Fed said.
The Fed released the scenarios Feb. 5. Specifically, the scenarios present a U.S. unemployment rate rising nearly 5.9 percentage points, to a peak of 10%. The unemployment rate increase in the scenarios is accompanied by severe market volatility, a widening of corporate bond spreads, and a collapse in asset prices, including about a 33% decline in house prices and a 30% decline in commercial real estate prices.
Large banks with substantial trading or custodial operations are also required under the scenarios to incorporate a counterparty default component to estimate potential losses “from the unexpected default of the firm’s largest counterparty amid an acute market shock,” the Fed said. In addition, banks with large trading operations are tested in the scenarios against a global market shock component that primarily stresses their trading and related positions, the agency said.
The stress tests, according to the Fed, measure whether banks have adequate capital to absorb losses so that they can lend to households and businesses even in a severe recession. The tests evaluate banks’ resilience by estimating losses, net revenue, and capital levels—which provide a cushion against losses—under a hypothetical recession scenario, according to the agency.
The results revealed in two weeks may be among the last under the current methods used by the Fed. In April, the agency proposed changes in the tests, including by averaging test results over two consecutive years. The agency said it was accepting comments for 60 days (ending around Tuesday, June 17).
In addition to averaging results over two years, the Fed has also proposed delaying the annual effective date of the stress capital buffer requirement from Oct. 1 to Jan. 1 of the following year. The Fed said in April that would give banks additional time to adjust to their new capital requirements.
The Fed said it was also proposing making targeted changes to streamline its stress test-related data collection. The proposed changes are not designed to materially affect overall capital requirements, the Fed said.