The Federal Reserve today released the hypothetical economic and financial market scenarios that it will use in the next round of stress tests for the nation’s largest financial institutions. This year’s stress tests will evaluate 34 large banks.
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. The severely adverse scenario would involve the U.S. unemployment rate rising by 5.75 percentage points to 10% by the third quarter of 2023, along with a 40% decline in commercial real estate prices, widening corporate bond spreads and a collapse in asset prices, including increased market volatility.
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.
In related news, the OCC also released its scenarios for banks and savings associations currently subject to the Dodd-Frank Act stress tests.
