The Federal Reserve will test banks’ abilities to withstand a broader array of hypothetical shocks this year after the collapse of multiple regional lenders.
The stress-test scenarios released by the Fed on Thursday represent the first annual exercise since Silicon Valley Bank and Signature Bank collapsed last March, which briefly sparked concerns about the broader banking system. This year’s exams will cover 32 banks with as little as $100 billion in assets — as previously scheduled.
Michael Barr, vice chair for supervision at the US Federal Reserve
In addition to their importance for oversight, the exams are closely watched by Wall Street because a passing score can effectively give banking giants a green light to return billions of dollars to investors in dividends and share buybacks. The results may also impact banks’ capital requirements, an issue that’s already being fiercely debated in Washington.
Still, some of this year’s hypothetical scenarios dubbed “exploratory analysis” won’t impact the capital requirements, the Fed said. This year’s exams will take place in the next few months and results will be released in June.
This year’s core test will examine how banks respond to an unemployment rate rise of nearly 6.5 percentage points, to a peak of 10%. That will be accompanied by intense market volatility and other issues, including a 40% drop in commercial real estate prices, the Fed said.
The tests were put in place after the 2008 financial crisis to ensure the US banking system could withstand turmoil. They are aimed help ensure that large banks are able to lend to households and businesses, even in a severe recession.
In a new wrinkle, this year’s exercise will also feature four exploratory shocks — as opposed to a single such hypothetical blow last year.
“Two of the hypothetical elements include funding stresses that cause a rapid repricing of a large proportion of deposits at large banks,” the Fed said in a statement. The other elements include a pair of market shocks that will be applied only to the largest and most complex banks.
Since taking office, Michael Barr, the Fed’s vice chair for supervision, has repeatedly said the exams may need changes to more completely capture risk.
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