Featured Product

    FED Releases Scenarios for Second Round of Stress Tests on Banks

    September 17, 2020

    FED released hypothetical scenarios for a second round of stress tests for banks. FED will be performing this additional round of stress tests due to the continued uncertainty from the COVID event. The results of the first round of stress tests had found that large banks are well-capitalized under a range of hypothetical events. In the second round, large banks will be tested against "severely adverse" and "alternative severe" scenarios, both of which feature severe recessions. FED will release results of the second-round stress tests by the end of 2020.

    The two hypothetical recessions in the scenarios feature severe global downturns with substantial stress in financial markets. The first scenario—the severely adverse—features the unemployment rate peaking at 12.5% at the end of 2021 and then declining to about 7.5% by the end of the scenario. Gross domestic product declines by about 3% from the third quarter of 2020 through the fourth quarter of 2021. The scenario also features a sharp slowdown abroad. The second scenario—the alternative severe—features an unemployment rate that peaks at 11% by the end of 2020 but stays elevated and only declines to 9% by the end of the scenario. In this second scenarios, gross domestic product declines by about 2.5% from the third to the fourth quarter of 2020. 

    The two scenarios also include a global market shock component that will be applied to banks with large trading operations. These banks, as well as certain banks with substantial processing operations, will also be required to incorporate the default of their largest counterparty. The scenarios are not forecasts and are significantly more severe than most current baseline projections for the path of the U.S. economy under the stress testing period. They are designed to assess the strength of large banks during hypothetical recessions, which is especially appropriate in a period of uncertainty. Each scenario includes 28 variables covering domestic and international economic activity.

    Earlier, in June, FED had released the results of its annual stress tests and additional sensitivity analysis, wherein FED required banks to take several actions to preserve their capital levels in the third quarter of this year. By the end of September, FED will announce whether those measures to preserve capital will be extended into the fourth quarter. The stress tests help ensure that large banks are able to lend to households and businesses even in a severe recession. The exercise evaluates the resilience of large banks by estimating their loan losses and capital levels—which provide a cushion against losses—under hypothetical recession scenarios over nine quarters into the future. 


    Related Links

    Keywords: Americas, US, Banking, Stress Testing, COVID-19, Severely Adverse Scenario, 2020 Stress Test, Alternative Adverse Scenario, FED

    Featured Experts
    Related Articles
    News

    ESAs Publish Reporting Templates for Financial Conglomerates

    ESAs published the final draft implementing technical standards on reporting of intra-group transactions and risk concentration of financial conglomerates subject to the supplementary supervision in EU.

    January 18, 2021 WebPage Regulatory News
    News

    EBA Publishes Report on Asset Encumbrance of Banks in EU

    EBA published the annual report on asset encumbrance of banks in EU.

    January 18, 2021 WebPage Regulatory News
    News

    US Agencies Publish Updates for Call Reports, FFIEC 101, and FR Y-9C

    FED updated the reporting form and instructions for the FR Y-9C report on consolidated financial statements for holding companies.

    January 15, 2021 WebPage Regulatory News
    News

    EBA Proposes Guidelines for Establishing Intermediate Parent Entities

    EBA issued a consultation paper on the guidelines on monitoring of the threshold and other procedural aspects of the establishment of intermediate EU parent undertakings, or IPUs, as laid down in the Capital Requirements Directive.

    January 15, 2021 WebPage Regulatory News
    News

    EC Adopts Financial Reporting Changes Arising from Benchmark Reforms

    EC published Regulation 2021/25 that addresses amendments related to the financial reporting consequences of replacement of the existing interest rate benchmarks with alternative reference rates.

    January 14, 2021 WebPage Regulatory News
    News

    BIS Bulletin Examines Key Elements of Policy Response to Cyber Risk

    BIS published a bulletin, or a note, that examines the cyber threat landscape in the context of the pandemic and discusses policies to reduce risks to financial stability.

    January 14, 2021 WebPage Regulatory News
    News

    HMT Updates List of Post-Brexit Equivalence Decisions in UK

    HM Treasury, also known as HMT, has updated the table containing the list of the equivalence decisions that came into effect in UK at the end of the transition period of its withdrawal from EU.

    January 14, 2021 WebPage Regulatory News
    News

    EBA Issues Erratum for Technical Package on Reporting Framework 3.0

    EBA published an erratum for technical package on phase 1 of the reporting framework 3.0.

    January 14, 2021 WebPage Regulatory News
    News

    APRA Publishes FAQ on Measurement of Credit Risk Weighted Assets

    APRA updated a frequently asked question (FAQ), for authorized deposit-taking institutions, on the measurement of credit risk weighted assets.

    January 14, 2021 WebPage Regulatory News
    News

    ECB Letter Sets Out Strategies to Address Issue of Nonperforming Loans

    ECB published a letter from Andrea Enria, the Chair of the Supervisory Board of ECB, answering questions raised by the President of the Bundestag (the German federal parliament) on how ECB assesses the financial stability of the euro area in the context of the significant level of nonperforming loans.

    January 14, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 6450