The Federal Reserve Board on Friday released the hypothetical scenarios for its 2021 bank stress tests. Last year, the Board found that large banks were generally well capitalized under a range of hypothetical events but due to continuing economic uncertainty placed restrictions on bank payouts to preserve the strength of the banking sector.
The Board’s 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 that extend nine quarters into the future.
“The banking sector has provided critical support to the economic recovery over the past year. Although uncertainty remains, this stress test will give the public additional information on its resilience,” Vice Chair for Supervision Randal K. Quarles said.
The hypothetical recession begins in the first quarter of 2021 and features a severe global downturn with substantial stress in commercial real estate and corporate debt markets. The U.S. unemployment rate in the “severely adverse” scenario rises by 4 percentage points from its starting point, reaching a peak of 10-3/4 percent in the third quarter of 2022. Gross domestic product falls 4 percent from the fourth quarter of 2020 through the third quarter of 2022, with asset prices dropping sharply, including a 55 percent decline in equity prices.
The full announcement is available at https://www.federalreserve.gov/newsevents/pressreleases/bcreg20210212a.htm