Federal Reserve Board releases the hypothetical scenarios for its annual stress test
The Federal Reserve Board on Wednesday released the hypothetical
scenarios for its annual stress test, which helps ensure that large
banks can lend to households and businesses even in a severe
recession. Additionally, the Board released two hypothetical elements
designed to probe different risks through its "exploratory analysis"
of the banking system. The exploratory analysis will not affect bank
capital requirements.
The Board's annual stress test
evaluates the resilience of large banks by estimating losses, net
revenue, and capital levelsâwhich provide a cushion against
lossesâunder hypothetical recession scenarios that extend two years
into the future. This year, 22 banks will be tested against a severe
global recession with heightened stress in both commercial and
residential real estate markets, as well as in corporate debt markets.
The scenarios are not forecasts and should not be interpreted as
predictions of future economic conditions.
In the 2025
stress test scenario, the U. S. unemployment rate rises nearly 5. 9
percentage points, to a peak of 10 percent. The unemployment rate
increase is accompanied by severe market volatility, a widening of
corporate bond spreads, and a collapse in asset prices, including
about a 33 percent decline in house prices and a 30 percent decline in
commercial real estate prices.
Large banks with
substantial trading or custodial operations are also required to
incorporate a counterparty default scenario component to estimate
potential losses from the unexpected default of the firm's largest
counterparty amid an acute market shock. In addition, banks with large
trading operations will be tested against a global market shock
component that primarily stresses their trading and related positions.
The table below shows the components of the annual stress test
that apply to each bank, based on data as of the third quarter of
2024.
This year's exploratory analysis includes two
separate hypothetical elements that will assess the resilience of the
banking system to a wider range of risks. One of the hypothetical
elements examines how banks would react to credit and liquidity shocks
in the non-bank financial institution sector during a severe global
recession.
The second element of the exploratory analysis
includes a market shock that will be applied only to the largest and
most complex banks. This shock hypothesizes the failure of five large
hedge funds with reduced global economic activity and higher
inflation.
The exploratory analysis is distinct from the
stress test and will explore additional hypothetical risks to the
broader banking system, rather than focusing on firm-specific results.
The Board will publish aggregate results for the exploratory analysis
alongside the annual stress test results in June 2025.
As
the Board previously announced, it plans to take steps soon to reduce
the volatility of stress test results and begin to improve model
transparency in the 2025 stress test. Additionally, it intends to
begin the public comment process on its comprehensive changes to the
stress test this year.
Bank1
Subject to
global market shock
Subject to counterparty default
American Express Company
Bank of America Corporation
X
X
The Bank of New York Mellon Corporation
X
Barclays US LLC
X
X
BMO
Financial Corp.
Capital One Financial Corporation
The Charles Schwab Corporation
Citigroup Inc.
X
X
DB USA Corporation
X
X
The Goldman Sachs Group, Inc.
X
X
JPMorgan Chase & Co.
X
X
M&T; Bank
Corporation2
Morgan Stanley
X
X
Northern Trust Corporation
The PNC Financial Services
Group, Inc.
RBC US Group Holdings LLC2
State Street
Corporation
X
TD Group US Holdings LLC
Truist Financial Corporation
UBS Americas Holding LLC
U. S. Bancorp
Wells Fargo & Company
X
X
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