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Fed Board releases annual stress tests for banks

2022 tests allow for continued Covid-19 uncertainty and knock-on asset price volatility

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  • Written by  Banking Exchange staff
Fed Board releases annual stress tests for banks

In 2022, 34 major US banks will be tested against a severe global recession, with elevated stress in commercial real estate and corporate debt, in the Federal Reserve’s annual bank stress test scenarios.

Stress tests assess the durability of large banks by approximating losses, revenues, and levels of capital amid a hypothetical recession of more than two years.

According to the Fed Board, the 2022 stress test scenario will include US unemployment rising 5 ¾ percentage points, to a limit of 10%, alongside a 40% decline in commercial real estate prices, widening corporate bond spreads, and asset price collapses, including elevated market volatility.

Banks with large trading volumes will also be subjected to a market shock element that places pressure on trading activity.

In addition, banks providing “substantial” securities services will be tested against the default of their largest transacting counterparty.

The results are used to set minimum capital requirements for large banks, among other things.

The 2022 Severely Adverse Scenario incorporates a greater increase in unemployment levels than the 2021 scenario, and therefore a larger decline in gross domestic product (GDP). Interest rates will also decline further relative to the 2021 test scenarios.

According to the report[1]: “The continued heightened uncertainty from the pandemic increases asset-price vulnerabilities, particularly for residential properties and commercial real estate.

“The current scenario features larger declines in house prices and similarly large declines in commercial real estate prices as compared to the previous year’s scenario.”

Banks subjected to the tests include Bank of America, Barclays US, Citigroup, Credit Suisse USA, Goldman Sachs, and Morgan Stanley.

Last year, capital requirements meant large banks were required to hold $1 trillion in high-quality capital between them, enough to ensure their survival in an extreme recession and retain their ability to lend to businesses and households.

[1] 2022 Stress Test Scenarios: Pg 7


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