FED Releases Hypothetical Scenarios for Stress Test Exercise in 2020
FED released hypothetical scenarios for the stress test exercise in 2020. This year, the stress tests will evaluate 34 large banks with more than USD 100 billion in total assets and include two hypothetical scenarios: baseline and severely adverse. Banks are required to submit their capital plans and the results of their own stress tests to FED by April 06, 2020. FED will announce the results of the supervisory stress tests by June 30, 2020. In its announcement, FED has disclosed the list of banks that will be undergoing the exercise this year, along with the components that apply to each participating bank.
Banks with large trading operations will be required to factor in a global market shock component as part of their scenarios. This year’s shock features, among other things, heightened stress to trading book exposures to leveraged loans. Additionally, firms with substantial trading or processing operations will be required to incorporate a counterparty default scenario component. The counterparty default scenario component involves the instantaneous and unexpected default of the largest counterparty of a firm.