By Annie Lekmayers | StockMarketNews.Today | email@example.com
The Federal Reserve on Tuesday said that its stress test for big banks will imagine a rapid increase in unemployment, as it announced the details of the hypothetical scenario that banks must survive to pass the latest round of the exams.
The Fed’s latest “severely adverse” scenario imagines unemployment rising by six percentage points to 10%, along with stress in corporate lending and commercial real-estate markets. “The hypothetical scenario features the largest unemployment rate change to date,” said Randal Quarles, the Fed’s vice chairman for supervision, in a written statement. “We are confident this scenario will effectively test the resiliency of the nation’s largest banks.”
Big banks must show the Fed they can survive the hypothetical scenario with enough capital to continue lending. If they fail, they face restrictions on payouts to shareholders. Test submissions are due in April and the results will be announced by the end of June, the Fed said.
The 2019 scenario generally applies to banks with more than $250 billion in assets, the Fed said. Smaller firms that completed the test last year won’t have to take the test again until next year, under new rules.
The Fed also announced Tuesday it has completed steps to boost the transparency of the models it uses to evaluate banks in the stress-test scenarios, giving banks a better idea of their chances at passing or failing. Specifically, the Fed said it would publish information about how hypothetical loan portfolios would fare under the tests, based on its internal models.
“The changes are intended to improve public understanding of the program while maintaining its ability to independently test large banks’ resilience,” the Fed said in a statement. The information will be published in the first quarter, before the tests are run.
The Fed is also considering other changes that would ease the stress testing process, including giving firms their results before they wrap up shareholder-return plans.
Big banks must pass the Fed’s stress tests to be able to make shareholder payouts, although the timing of the test results means banks set those plans before knowing how they performed.
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