Quarles: Large Bank Stress Tests to Assess Industry Performance Under COVID-19 Scenarios

The latest stress test results for the nation’s largest banks will include a “sensitivity analysis” of how institutions would perform under three distinct scenarios related to the coronavirus pandemic and economic recovery, Federal Reserve Vice Chairman for Supervision Randal Quarles said today. The Fed is conducting this sensitivity analysis in addition to its normal Comprehensive Capital Analysis and Review process, which includes a “severely adverse” scenario that was published in February 2020 before the pandemic began. 

With respect to the scenarios used in the sensitivity analysis, Quarles said the Fed will consider a “V-shaped” recovery, where output declines and job losses were mostly reversed by the end of 2020; a slower, “U-shaped” recovery, in which only a small share of lost output was regained in 2020; and a “W-shaped” recovery in which there would be a short-lived recovery followed by another severe drop in economic activity later in the year if additional containment measures are needed. He emphasized that the scenarios “are not forecasts by the Fed or me, only plausible scenarios that span the range of where many private forecasters think the economy could be headed.”

In this year’s published stress test results, the Fed will “provide key details about the three downside risk paths for the economy and targeted adjustments” as well as aggregated results to illustrate how the banking system as a whole would perform in each scenario, but will not include firm-specific results, Quarles said. He added that the Fed will “use the results of our sensitivity analysis to inform our overall stance on capital distributions and in ongoing bank supervision.”

Finally, Quarles said that the firms will receive their stress capital buffer requirements from the Fed for the coming year next week and will have a period of time to make adjustments to their capital plans before the final capital requirements are released publicly for each firm later in the year. The SCB requirements will be based on the scenarios published in February 2020.