FED Releases Scenarios for the 2021 Stress Tests for Banks
FED released hypothetical scenarios for the 2021 stress tests for banks. The published hypothetical scenarios are Baseline and Severely Adverse scenarios, with each scenario including 28 variables covering domestic and international economic activity. This year, 19 large banks will be subject to the stress test, though smaller banks that are on a two-year stress test cycle can opt in to the test this year by April 05, 2021. FED also published a table that shows the components that would apply to each bank and identifies the banks that are on a two-year cycle, based on data as of September 30, 2020.
Both the published scenarios start in the first quarter of 2021 and extend through the first quarter of 2024. The baseline scenario follows a profile similar to average projections from a survey of economic forecasters. The severely adverse scenario follows the Policy Statement, of FED, on the Scenario Design Framework for Stress Testing and is characterized by a severe global recession accompanied by a period of heightened stress in commercial real estate and corporate debt markets. The severely adverse scenario describes a hypothetical set of conditions designed to assess the strength and resilience of banking organizations to an adverse economic environment. In addition, banks with substantial trading or processing operations will be tested against the default of their largest counterparty. The stress tests of FED help ensure that large banks are able to lend to households and businesses even in a severe recession. Last year, FED found that large banks were generally well-capitalized under a range of hypothetical events; however, due to continuing economic uncertainty, FED had placed restrictions on bank payouts to preserve the strength of the banking sector.
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Keywords: Americas, US, Banking, Stress Testing Scenarios, Stress Testing, Baseline Scenario, Severely Adverse scenario, Basel, FED
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