Tags: fed | bank | stress | test

Fed Releases Global Shock Stress Test Scenario for Biggest Banks

Monday, 28 Jan 2013 02:32 PM


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The Federal Reserve released “adverse and severely adverse” global financial market scenarios to measure the strength of six large banks, as part of tests that will be released in March.

The six banks — Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc., JPMorgan Chase & Co., Morgan Stanley and Wells Fargo & Co. — will have their portfolios tested as part of the annual stress test process established by the Dodd- Frank Act.

The U.S. central bank started stress tests in 2009 to restore confidence in the financial system after the worst crisis since the Great Depression brought down Bear Stearns Cos. and Lehman Brothers Holdings Inc. Regulators have since complemented the tests with the capital-planning requirement to improve boards’ management of risk and dividend and stock- buyback decisions.

“Supervisory stress test results will include data such as capital ratios, revenue, and loss estimates under a severely adverse scenario,” the Fed said. The parameters will include “a severely adverse scenario provided by the Federal Reserve, and reflect the capital actions the companies plan to undertake.”

The central bank will release results from supervisory stress tests at 4:30 p.m. on March 7. Details about whether banks will be able to pay dividends or must build more capital, known as the Comprehensive Capital Analysis and Review, will be released at 4:30 p.m. on March 14, the Fed said today in a release in Washington.

Scenarios Released

The scenarios released today contain data on global equity markets in dozens of countries and how much they might decline from an adverse shock. Banks must test, for example, against a 33 percent drop in equities in China, a 60 percent decline in Spain, and a 75 percent decline in Ireland.

The central bank previously released the economic scenarios in November. The worst of those scenarios would test the bank against a recession in which U.S. gross domestic product declines by 6.1 percent and the unemployment rate climbs as high as 12.1 percent.

When the Fed released its economic scenarios in November it said they were not forecasts and were “designed to assess the strength and resilience of financial institutions and their ability to continue to meet the credit needs of households and businesses.”

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