WASHINGTON–The Federal Reserve has released hypothetical scenarios for 2021 bank stress tests as required under the Dodd-Frank Act, saying tests will be required of 19 large banks, with 14 others having until April 5 to opt into the stress testing should they wish to do so.
According to the Fed, those 14 banks are smaller institutions subject to less-stringent prudential standards than other banks that are required to conduct stress testing every other year.
The stress testing requirement was put in place following the Great Recession of more than a decade ago and are aimed at ensuring the country’s largest banks are able to lend to households and businesses even in a severe recession. According to the Fed, the exercise evaluates large banks’ resiliency by making estimates of loan losses and capital levels under hypothetical economic scenarios that extend nine quarters into the future.
The hypothetical recession in the newest test begins the first quarter of 2021 and features a severe global downturn with substantial stress in commercial real estate and corporate debt markets, the Fed stated. For example, under the “severely adverse” scenario, the U.S. unemployment rate rises by four percentage points from its starting point and hits a peak of 10.785% in Q3 2022. At the same time, GDP falls 4% from Q4 2020 through Q3 2022, with asset prices dropping sharply, including a 55% decline in equity prices.
In addition, the Fed said in its newest stress testing scenarios banks with large trading operations will be tested against a global market shock component that stresses their trading, private equity, and other fair value positions. Moreover, banks with substantial trading or processing operations will be tested against the default of their largest counterparty.
Banks on the List
The 19 banks required to participate in this year’s stress tests include:
- Bank of America
- The Bank of New York Mellon
- Barclays US
- Capital One Financial
- Citigroup
- Credit Suisse Holdings
- DB USA
- The Goldman Sachs Group
- HSBC North America Holdings
- JPMorgan Chase
- Morgan Stanley
- Northern Trust
- The PNC Financial Services Group
- State Street
- TD Group
- Truist Financial
- UBS Americas
- S. Bancorp
- Wells Fargo