The Federal Reserve today released the hypothetical scenarios for its annual stress test, which is designed to ensure that large banks can lend to households and businesses even in a severe recession. The Fed also released two hypothetical elements designed to probe different risks through its “exploratory analysis” of the banking system. The exploratory analysis will not affect bank capital requirements.
This year, 22 banks will be tested against a severe global recession with heightened stress in both commercial and residential real estate markets, as well as in corporate debt markets, according to the Fed. The scenarios are not forecasts and should not be interpreted as predictions of future economic conditions, it added.
This year’s exploratory analysis includes two separate hypothetical elements. One element examines how banks would react to credit and liquidity shocks in the non-bank financial institution sector during a severe global recession. The second element includes a market shock that will be applied only to the largest and most complex banks.
