Fed offers details on additional bank stress test triggered by COVID-19

WASHINGTON — The Federal Reserve published hypothetical scenarios Thursday for the supplemental stress tests the largest banks must undergo in light of the uncertain economic environment.

The central bank is holding the first-ever “midcycle” stress test to get a firmer grasp of banks’ capital strength since onset of the coronavirus pandemic. The most recent results of the Fed’s normal test were based significantly on yearend 2019 financial data. The supplemental tests will use data from this year’s economic tremors.

The midcycle test will include two scenarios: a “severely adverse” scenario and an “alternative severe” scenario. Both are much more dire than current forecasts for the U.S. economic recovery from the pandemic.

The first scenario factors in an unemployment rate that tops out at 12.5% at the end of 2021, a sharp slowdown abroad and a decline of 3% in gross domestic product from the third quarter of 2020 through the fourth quarter of 2021. The second scenario will test banks against an unemployment rate that peaks at 11% by the end of this year but remains high through the end of the scenario, and a 2.5% decline in GDP.

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