Featured Product

    FED Publishes Results of Stress Test and COVID Sensitivity Analysis

    June 25, 2020

    FED published results of the Dodd-Frank Act Stress Test (DFAST) for 2020, along with the results of an additional sensitivity analysis that explored the vulnerabilities of banks to the downside risks to the economy posed by the COVID-19 outbreak and the resulting response (alternatively COVID event). The DFAST exercise reveals that, in aggregate, the 33 firms subject to the supervisory stress test would experience substantial losses under the severely adverse scenario. Nevertheless, these firms could continue lending to businesses and households, due to the substantial buildup of capital since the financial crisis. Additionally, the results of the sensitivity analysis, using three alternative downside scenarios, show that banks are projected to remain above the minimum regulatory capital requirements.

    Sensitivity analysis on impact of COVID-19 event

    The sensitivity analysis assessed the resilience of large banks under three hypothetical recessions, or downside scenarios, which could result from the coronavirus event. The scenarios included a V-shaped recession and recovery, a slower, U-shaped recession and recovery, and a W-shaped, double-dip recession. In aggregate, loan losses for the 34 banks ranged from USD 560 billion to USD 700 billion in the sensitivity analysis and aggregate capital ratios declined from 12.0% in the fourth quarter of 2019 to between 9.5% and 7.7% under the hypothetical downside scenarios. Under the U- and W-shaped scenarios, most firms remain well-capitalized but several would approach minimum capital levels. The sensitivity analysis does not incorporate the potential effects of government stimulus payments and expanded unemployment insurance. Since the scenarios were developed in early April, certain economic and financial market indicators have improved somewhat. However, the path of the economy remains uncertain, so FED is taking several actions to help ensure that all firms remain sufficiently capitalized until the economy recovers. FED will

    • Suspend share repurchases
    • Cap dividend payments, allowing dividends according to a formula based on recent income
    • Require banks to re-assess their capital needs and resubmit their capital plans later this year All large banks will be required to resubmit and update their capital plans later this year to reflect current stresses, which will help firms re-assess their capital needs and maintain strong capital planning practices during this period of uncertainty. 
    • Conduct additional stress analyses each quarter to determine if adjustments to this response are appropriate

    The restrictions will apply for the third quarter of 2020 and may be extended by FED quarter-by-quarter, as the economic situation continues to evolve. 

    DFAST 2020

    The results of the full stress test designed before the coronavirus are comparable to the V-shaped downside scenario in the sensitivity analysis, in aggregate, and show that all large banks remain strongly capitalized. The results suggest that, in the aggregate, the 33 firms subject to the supervisory stress test would experience substantial losses under the severely adverse scenario. Aggregate losses at the 33 firms under the severely adverse scenario are projected to be USD 552 billion. For the 18 firms for which stress test results were disclosed both last year and this year, total losses under the severely adverse scenario are USD 433 billion in DFAST 2020, compared to USD 410 billion for the same 18 firms in DFAST 2019. Aggregate loan losses as a percent of average loan balances in the severely adverse scenario are similar in DFAST 2020 compared to the past several years. The higher loss rates this year reflect, in part, the effect of the relatively more severe scenario

    FED will use the results of this test to set the new stress capital buffer requirement for these firms, which will take effect, as planned, in the fourth quarter of the year. Additionally, FED will not be objecting to five foreign banks whose capital planning practices were evaluated as part of the stress tests. In DFAST 2020, FED published results for 33 firms subject to supervisory stress testing requirements, with 18 firms subject to annual supervisory stress test requirements and 15 firms subject to the two-year supervisory stress test cycle. The DFAST cycle begins in the first quarter of 2020 and ends in the first quarter of 2022. This year, FED also amended its stress testing requirements to remove the adverse scenario in its supervisory stress test. 

     

    Related Links

    Keywords: Americas, US, Banking, Stress Testing, Dodd-Frank Act, DFAST, Sensitivity Analysis, COVID-19, FED

    Featured Experts
    Related Articles
    News

    EC Issues Regulation on Adjustments to K-Factor Coefficients Under IFR

    The European Commission (EC) published a report summarizing responses to the targeted consultation on the supervisory convergence and the single rulebook in the European Union (EU).

    January 20, 2022 WebPage Regulatory News
    News

    OSFI Issues Results of Pilot on Climate Risk Scenario Analysis

    The Office of the Superintendent of Financial Institutions (OSFI) published an update on the discussion paper that intended to engage federally regulated financial institutions and other interested stakeholders in a dialog with OSFI, to proactively enhance and align assurance expectations over key regulatory returns.

    January 20, 2022 WebPage Regulatory News
    News

    ECB Issues Opinions on Green Bonds Standard and CRR Proposals

    The European Central Bank (ECB) published its opinion on a proposal for a regulation on European green bonds, following a request from the European Parliament.

    January 19, 2022 WebPage Regulatory News
    News

    ESRB Explores Policy Response to Risks Arising from Digitalization

    The Advisory Scientific Committee (ASC) of the European Systemic Risk Board (ESRB) published a report that explores the expected impact of digitalization on provision of financial and banking services, and proposes policy measures to address the risks stemming from digitalization.

    January 18, 2022 WebPage Regulatory News
    News

    EU Authorities Address COVID-19 Reporting, MCD, and PSD2 Issues

    The European Banking Authority (EBA) announced that the guidelines on the reporting and disclosure of exposures subject to measures COVID-relief measures shall continue to apply until further notice.

    January 17, 2022 WebPage Regulatory News
    News

    FI Publishes Multiple Regulatory and Reporting Updates

    The Swedish Financial Supervisory Authority (FI) announced that the capital adequacy reporting as at December 31, 2021 must be done by February 11, 2022.

    January 17, 2022 WebPage Regulatory News
    News

    BSP Tackles Aspects of Lending and Islamic, Open & Sustainable Finance

    The Central Bank of the Philippines (BSP) issued communications covering developments related to online lending platforms, open finance framework and roadmap, and on the expected regulations in the area sustainable finance.

    January 16, 2022 WebPage Regulatory News
    News

    US Agencies Issue Regulatory Updates, FDIC Launches Tech Sprint

    The Board of Governors of the Federal Reserve System (FED) published the final rule that amends Regulation I to reduce the quarterly reporting burden for member banks by automating the application process for adjusting their subscriptions to the Federal Reserve Bank capital stock, except in the context of mergers.

    January 13, 2022 WebPage Regulatory News
    News

    EBA Issues Guide on Bank Resolvability, Consults on Transferability

    The European Banking Authority (EBA) published its assessment of risks through the quarterly Risk Dashboard and the results of the Autumn edition of the Risk Assessment Questionnaire (RAQ).

    January 13, 2022 WebPage Regulatory News
    News

    MFSA Publishes CRD5 Updates and Supervisory Priorities for 2022

    The Malta Financial Services Authority (MFSA) updated the guidelines on supervisory reporting requirements under the reporting framework 3.0.

    January 13, 2022 WebPage Regulatory News
    RESULTS 1 - 10 OF 7875