Fed releases scenarios for 2020 stress testing cycle

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WASHINGTON — The Federal Reserve on Thursday released its 2020 stress testing scenarios that it will use to evaluate the safety and soundness of 34 banks with more than $100 billion of total assets.

The harshest scenario banks will be tested against this cycle features a severe global recession with elevated stresses in corporate debt markets and commercial real estate. Banks with large trading operations will be required to factor in a global market shock, which will include added pressure on leveraged loans.

In that severely adverse scenario, banks would also have to account for a rise in the U.S. unemployment rate by 6.5 percentage points to 10%.

“This year’s stress test will help us evaluate how large banks perform during a severe recession, and give us increased information on how leveraged loans and collateralized loan obligations may respond to a recession,” Fed Vice Chair for Supervision Randal Quarles said in a statement.

The Fed reiterated that it is continuing to work toward finalizing the stress capital buffer so it will be in place for this year’s tests.

The Fed conducts two separate stress tests every year on each of the bank holding companies under its supervision with more than $100 billion of assets. Last year the Fed exempted most regional banks with assets of $100 billion to $250 billion from the 2019 stress testing cycle.

The first test is the Dodd-Frank Act Stress Test, which examines a bank’s balance sheet performance under the scenarios using a standard capital management plan. The second is the Comprehensive Capital Analysis and Review, which uses the bank’s own capital management plan to better assess how the bank might actually perform under the same conditions. Each test examines a bank’s performance over nine future consecutive quarters.

The baseline scenario for the 2020 cycle “is in line with average projections from surveys of economic forecasters,” the Fed said in a news release. Both the baseline and the severely adverse scenario contain 28 variables, including interest rates, stock market prices and gross domestic product.

The Fed reiterated that it is continuing to work toward finalizing the stress capital buffer so it will be in place for this year’s tests.

Banks are required to submit their capital plans as well as the results of their internal stress tests to the Fed by April 6. The Fed plans to announce the results of the stress tests by June 30.

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Stress tests Federal Reserve Randal Quarles Policymaking Dodd-Frank Capital requirements
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