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 19 large banks. Smaller banks are on a two-year stress test cycle, but may opt in to this year’s test by April 5.
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 4 percentage points to 10.75%, along with substantial stress in commercial real estate and corporate debt markets.
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 today released its scenarios for banks and savings associations currently subject to the Dodd-Frank Act stress tests.
