FED Releases Hypothetical Scenarios for Stress Test Exercise in 2020
FED released hypothetical scenarios for the stress test exercise in 2020. This year, the stress tests will evaluate 34 large banks with more than USD 100 billion in total assets and include two hypothetical scenarios: baseline and severely adverse. Banks are required to submit their capital plans and the results of their own stress tests to FED by April 06, 2020. FED will announce the results of the supervisory stress tests by June 30, 2020. In its announcement, FED has disclosed the list of banks that will be undergoing the exercise this year, along with the components that apply to each participating bank.
The severely adverse scenario and baseline scenarios are not forecasts. The severely adverse scenario describes a hypothetical sets of events designed to assess the strength of banking organizations. Similarly, the baseline scenario is in line with average projections from surveys of economic forecasters. Each scenario includes 28 variables—such as gross domestic product, the unemployment rate, stock market prices, and interest rates—covering domestic and international economic activity. The severely adverse scenario this year features a severe global recession in which the U.S. unemployment rate rises by 6.5 percentage points to 10% and elevated stress in corporate debt markets and commercial real estate. The scenarios start in the first quarter of 2020 and extend through the first quarter of 2023.
Banks with large trading operations will be required to factor in a global market shock component as part of their scenarios. This year's shock features, among other things, heightened stress to trading book exposures to leveraged loans. Additionally, firms with substantial trading or processing operations will be required to incorporate a counterparty default scenario component. The counterparty default scenario component involves the instantaneous and unexpected default of the largest counterparty of a firm.
The stress test exercise ensures that large banks have adequate capital and processes so that they can continue lending to households and businesses, even during a severe recession. The stress test framework of FED consists of the Comprehensive Capital Analysis and Review, also known as CCAR, and the Dodd-Frank Act stress tests.
Related Links
Keywords: Americas, US, Banking, Stress Testing, DFAST, CCAR, 2020 Stress Test, Severely Adverse Scenario, Baseline Scenario, Stress Testing Scenarios, FED
Featured Experts
James Partridge
Credit analytics expert helping clients understand, develop, and implement credit models for origination, monitoring, and regulatory reporting.
Laurent Birade
Advises U.S. and Canadian financial institutions on risk and finance integration, CCAR/DFAST stress testing, IFRS9 and CECL credit loss reserving, and credit risk practices.
Amnon Levy
Financial researcher; authority in credit portfolio management and AI/ML, risk-based pricing, climate and credit, CECL/IFRS 9; credit and ALM
Previous Article
ESMA Publishes Its Strategy on Sustainable FinanceRelated Articles
BCBS Finalizes Revisions to Credit Valuation Adjustment Risk Framework
BCBS Finalizes Revisions to Credit Valuation Adjustment Risk Framework
PRA Statement on Application of Matching Adjustment Amid Crisis
PRA published a statement to insurers that clarifies the approach to application of the matching adjustment during COVID-19 crisis.
EBA Provides Clarity on Implementation of Certain COVID-19 Policies
EBA published a report on the implementation of selected COVID-19 policies within the prudential framework for banking sector.
EC Consults on Revision of Network and Information Systems Directive
EC launched a consultation to revise the network and information systems (NIS) Directive (2016/1148), which was adopted in July 2016 and is the first horizontal internal market instrument aimed at improving the resilience of the EU against cybersecurity risks.
PRA Statement on LIBOR Transition and PRA Resolution-Related Rules
PRA published a statement that outlines its view on the implications of LIBOR transition for contracts in scope of the “Contractual Recognition of Bail-In” and “Stay in Resolution” parts of the PRA Rulebook.
PRA Issues Updates to Pillar 2A Capital Framework in UK
PRA published the policy statement PS15/20 to reflect additional resilience associated with higher macro-prudential buffers in a standard risk environment with a reduction in Pillar 2A capital requirements.
BCBS Report Examines Progress on Adoption of Basel III Framework
BCBS published the eighteenth progress report on implementation of the Basel III regulatory framework in member jurisdictions.
FCA Proposes Guidance to Further Support Consumer Credit Customers
FCA announced proposals that would provide continued support for certain consumer credit products to users, who are facing a financial impact because of the exceptional circumstances arising from the COVID-19 pandemic.
ACPR Publishes Draft of Taxonomy RAN 1.4.0 for Solvency II Reporting
ACPR published a draft version of taxonomy RAN 1.4.0_PWD1, along with the related documentation, for Solvency II reporting.
BCBS Amends Guidelines on Sound Management of AML/CFT Risks
BCBS amended the guidelines on sound management of risks related to money laundering and financing of terrorism (ML/FT).
