FED – FED releases hypothetical scenarios for its 2021 bank stress tests

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February 12, 2021

FED releases hypothetical scenarios for its 2021 bank stress tests

For release at 9:15 a.m. EST

The FED on Friday released the hypothetical scenarios for its 2021 bank stress tests. Last year, the Board found that large banks were generally well capitalized under a range of hypothetical events but due to continuing economic uncertainty placed restrictions on bank payouts to preserve the strength of the banking sector.

The Board’s stress tests help ensure that large banks are able to lend to households & businesses even in a severe recession. The exercise evaluates the resilience of large banks by estimating their loan losses & capital levels—which provide a cushion against losses—under hypothetical recession scenarios that extend nine quarters into the future.

“The banking sector has provided critical support to the economic recovery over the past year. Although uncertainty remains, this stress test will give the public additional information on its resilience,” Vice Chair for Supervision Randal K. Quarles said.

The hypothetical recession begins in the first quarter of 2021 & features a severe global downturn with substantial stress in commercial real estate & corporate debt markets. The U.S. unemployment rate in the “severely adverse” scenario rises by 4 percentage points from its starting point, reaching a peak of 10-3/4 percent in the third quarter of 2022. Gross domestic product falls 4 percent from the fourth quarter of 2020 through the third quarter of 2022, with asset prices dropping sharply, including a 55 percent decline in equity prices. The chart below shows the path of the unemployment rate:

This is a line chart titled Unemployment rate in the severely adverse scenario, 2014:Q1-2024:Q1. The x axis ranges from 2014:Q1 to 2024:Q1. The y axis ranges from 3 to 15 percent. The data are quarterly. There are two variables charted on the plot. The first variable, labeled Actual, the unemployment rate for the third quarter of 2020 is based on the forecasts of professional forecasters, is designated by a blue solid line. This variable begins at about 7 percent in 2014:Q1. It slowly declines until it rapidly peaks at 13 percent in 2020:Q2. It then declines to end at about 7 percent in 2020:Q3. The second, variable, labeled Severely adverse, is designated by an orange dotted line. The variable begins at about 7 percent in 2020:Q3, but increases to about 11 percent in 2022:Q2. It then declines & ends at about 7.5 percent in 2024:Q1.

This year, 19 large banks will be subject to the stress test. Smaller banks are on a two-year stress test cycle but can opt in to this year’s test & must do so by April 5. Banks with large trading operations will be tested against a global market shock component that stresses their trading, private equity, & other fair value positions. Additionally, banks with substantial trading or processing operations will be tested against the default of their largest counterparty. A table below shows the components that would apply to each bank, as well as identifying which banks are on a two-year cycle, based on data as of September 30, 2020.

The scenarios are not forecasts & the severely adverse scenario is 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 & international economic activity.

BankSubject to 2021 stress testCan opt in to 2021 stress testSubject to global market shockSubject to counterparty default
Ally Financial Inc.X
American Express CompanyX
Bank of America CorporationXXX
The Bank of New York Mellon CorporationXX
Barclays US LLCXXX
BMO Financial Corp.X
BNP Paribas USA, Inc.X
Capital One Financial CorporationX
Citigroup Inc.XXX
Citizens Financial Group, Inc.X
Credit Suisse Holdings (USA), Inc.XXX
DB USA CorporationXXX
Discover Financial ServicesX
Fifth Third BancorpX
The Goldman Sachs Group, Inc.XXX
HSBC North America Holdings Inc.XXX
Huntington Bancshares IncorporatedX
JPMorgan Chase & Co.XXX
M&T Bank CorporationX
Morgan StanleyXXX
MUFG Americas Holdings CorporationX
Northern Trust CorporationX
The PNC Financial Services Group, Inc.X
RBC US Group Holdings LLCX
Regions Financial CorporationX
Santander Holdings USA, Inc.X
State Street CorporationXX
TD Group US Holdings LLCX
Truist Financial CorporationX
UBS Americas Holding LLCX
U.S. BancorpX
Wells Fargo & CompanyXXX

Last Update:

February 12, 2021

Source: Federal Reserves

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