The Federal Reserve today released the two hypothetical economic and financial market scenarios that it will use in the next round of the Comprehensive Capital Analysis and Review process for the nation’s largest financial institutions. This year’s stress tests will evaluate 34 large banks with more than $100 billion in total assets.
The two scenarios—baseline and severely adverse—include 28 variables, such as GDP, unemployment rate, stock market prices and interest rates. The baseline scenario is in line with average projections from surveys of economic forecasters. Under the severely adverse scenario, the world would plunge into a severe global recession in which the U.S. unemployment rate rises by 6.5 percentage points to 10%, along with elevated stress in corporate debt markets and commercial real estate.
Firms with large trading operations will participate in an additional test of reactions to a global market shock. Firms with substantial trading or processing operations will be required to incorporate a counterparty default scenario. Capital plans must be submitted to the Fed by April 6.
The Fed added that it is continuing to work toward having the stress capital buffer in place for this year’s stress tests, and that the release of these hypothetical scenarios does not affect that separate rulemaking process.