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 scenarios also include a global market shock component that will be applied to banks with large trading operations. These banks, as well as certain banks with substantial processing operations, will also be required to incorporate the default of their largest counterparty. The scenarios are not forecasts and are significantly more severe than most current baseline projections for the path of the U.S. economy under the stress testing period. They are designed to assess the strength of large banks during hypothetical recessions, which is especially appropriate in a period of uncertainty. Each scenario includes 28 variables covering domestic and international economic activity.