FED Releases Scenarios for Second Round of Stress Tests on Banks

FED released hypothetical scenarios for a second round of stress tests for banks. FED will be performing this additional round of stress tests due to the continued uncertainty from the COVID event. The results of the first round of stress tests had found that large banks are well-capitalized under a range of hypothetical events. In the second round, large banks will be tested against “severely adverse” and “alternative severe” scenarios, both of which feature severe recessions. FED will release results of the second-round stress tests by the end of 2020.

The two hypothetical recessions in the scenarios feature severe global downturns with substantial stress in financial markets. The first scenario—the severely adverse—features the unemployment rate peaking at 12.5% at the end of 2021 and then declining to about 7.5% by the end of the scenario. Gross domestic product declines by about 3% from the third quarter of 2020 through the fourth quarter of 2021. The scenario also features a sharp slowdown abroad. The second scenario—the alternative severe—features an unemployment rate that peaks at 11% by the end of 2020 but stays elevated and only declines to 9% by the end of the scenario. In this second scenarios, gross domestic product declines by about 2.5% from the third to the fourth quarter of 2020. 

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