The hypothetical scenarios help to ensure that large banks have adequate capital and processes so that they can continue lending to households and businesses, even during a severe recession.
The Federal Reserve Board has issued the scenarios banks and supervisors will use for the 2020 Comprehensive Capital Analysis and Review (CCAR) and Dodd-Frank Act stress test exercises. The Office of the Comptroller of the Currency has also released economic and financial market scenarios for use in the upcoming stress tests for covered institutions.
Fed scenarios. The Fed stress tests and capital planning evaluation apply to domestic bank holding companies and foreign bank intermediate holding companies with more than $100 billion in total consolidated assets. The stress tests run by the firms and the Board apply two hypothetical scenarios:
- baseline—in line with average projections from surveys of economic forecasters; and
- severely adverse—a severe global recession in which the U.S. unemployment rate rises by more than 6.5 percentage points to 10 percent and elevated stress in corporate loan and commercial real estate markets.
"This year's stress test will help us evaluate how large banks perform during a severe recession, and give us increased information on how leveraged loans and collateralized loan obligations may respond to a recession," said Vice Chairman for Supervision Randal K. Quarles.
Each of the 2020 scenarios includes 28 variables—such as gross domestic product, the unemployment rate, stock market prices, and interest rates—covering domestic and international economic activity. Firms with large trading operations will be required to factor in a global market shock component, and firms with substantial trading or processing operations will be required to incorporate a counterparty default component.
Banks are required to submit their capital plans and the results of their own stress tests to the Fed by April 6, 2020. The Fed will announce the results of its supervisory stress tests by June 30, 2020.
OCC scenarios. The OCC’s supervisory scenarios include baseline and severely adverse scenarios for covered national banks and federal savings associations to conduct the annual company-run stress tests. The results, the OCC said, provide forward-looking information used in bank supervision that assist it in assessing the company’s risk profile and capital adequacy.
The OCC has finalized the 2020 Dodd-Frank Act Annual Stress Test Scenario Information with templates, instructions, and scenarios.
MainStory: TopStory BankHolding BankingFinance CapitalBaselAccords DoddFrankAct FederalReserveSystem FinancialStability PrudentialRegulation FedTracker
Interested in submitting an article?
Submit your information to us today!Learn More
Banking and Finance Law Daily: Breaking legal news at your fingertips
Sign up today for your free trial to this daily reporting service created by attorneys, for attorneys. Stay up to date on banking and finance legal matters with same-day coverage of breaking news, court decisions, legislation, and regulatory activity with easy access through email or mobile app.