Fed asks banks for stress tests

The Federal Reserve is asking 30 big banks to make sure their capital can withstand a deep recession in which the unemployment rate rises to 12%.

The Fed, which first required big banks to conduct “stress tests” in 2009, laid out three scenarios lenders have to test against. The goal is to ensure that the firms have enough capital to continue operations during stressful economic times.

The Fed stressed they were not making economic forecasts “but rather hypothetical scenarios designed to assess the strength of financial institutions in stressful economic environments.”

In addition to considering an unemployment rate of roughly 12% — up from 7.9% in October — in the most severe recession scenario, banks must evaluate how their capital buffers would withstand real GDP declining by around 5%.

Banks will also have to test for equity prices that would fall by more than 50% over the course of the recession, with house prices declining more than 20% and with commercial real estate prices falling by a similar amount.
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