The Federal Reserve today released two hypothetical economic and financial market scenarios that it will use in the next round of bank stress tests for the nation’s largest financial institutions. While the 34 banks that participated in the annual Comprehensive Capital Analysis and Review process earlier this year were found to be well capitalized under a range of hypothetical events, the Fed is performing a second round of stress testing due to the heightened uncertainty around the COVID-19 pandemic. The Fed will release firm-specific results of the tests later in the year.
For this second round of stress testing, both scenarios feature severe recessions that will test firms’ resilience under a range of outcomes. Under the first “severely adverse” scenario, unemployment would reach a peak at 12.5% at the end of 2021 and then decline to about 7.5%, while GDP would fall about 3% between the third quarter of 2020 and the fourth quarter of 2021. It also features a sharp global economic slowdown. The second scenario features an unemployment rate peaking at 11% by the end of 2020 but remaining elevated, falling to just 9% by the end of the scenario. Meanwhile, GDP under this “alternative severe” scenario would decline about 2.5% from the third to fourth quarter.
Both scenarios would also include a global market shock component that will be applied to banks with large trading operations. The Fed noted that the scenarios are not forecasts and are “significantly more severe than the current baseline projections for the path of the U.S. economy.”