Twenty-two large banks will face annual stress tests this year against a severe global recession with heightened stress in both commercial and residential real estate markets, as well as in corporate debt markets, the Federal Reserve said late Wednesday.
The hypothetical scenarios for the annual stress test helps ensure that large banks can lend to households and businesses even in a severe recession, the Fed said in a release. The 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 agency said.
For 2025, the agency said, two hypothetical elements were included to probe different risks through an “exploratory analysis” of the banking system. The exploratory analysis will not affect bank capital requirements, according to the Fed. The exploratory analysis includes how banks would react to credit and liquidity shocks in the non-bank financial institution sector during a severe global recession, and; a market shock that will be applied only to the largest and most complex banks. This shock hypothesizes the failure of five large hedge funds with reduced global economic activity and higher inflation, the Fed said.
Key elements of the 2025 test include:
- the U.S. unemployment rate rises nearly 5.9 percentage points, to a peak of 10%.
- The unemployment rate increase is accompanied by severe market volatility, a widening of corporate bond spreads, and a collapse in asset prices.
- The asset price collapse includes 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 to incorporate a counterparty default scenario component to estimate potential losses from the unexpected default of the firm’s largest counterparty amid an acute market shock,” the Fed noted. “In addition, banks with large trading operations will be tested against a global market shock component that primarily stresses their trading and related positions.”
Banks being tested include:
- American Express Co.
- Bank of America Corp.
- The Bank of New York Mellon Corp.
- Barclays US LLC
- BMO Financial Corp.
- Capital One Financial Corp.
- The Charles Schwab Corp.
- Citigroup Inc.
- DB USA Corp.
- The Goldman Sachs Group, Inc.
- JPMorgan Chase & Co.
- M&T Bank Corp.2
- Morgan Stanley
- Northern Trust Corp.
- The PNC Financial Services Group, Inc.
- RBC US Group Holdings LLC2
- State Street Corp.
- TD Group US Holdings LLC
- Truist Financial Corp.
- UBS Americas Holding LLC
- U.S. Bancorp
- Wells Fargo & Co.
Federal Reserve Board releases the hypothetical scenarios for its annual stress test
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