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US banks to face severe recession scenario in Fed stress tests

03 February 2017


Scenarios of the US unemployment rate rising to 10% will be part the checks

Read more: stress tests banks Dodd Frank

Wall Street banks will have to prove they can survive a severe global recession as part of an annual test by the Federal Reserve.

Details of the Fed's plans for 2017's Dodd-Frank Act stress test exercises were revealed on Friday.

The tests are a forward-looking assessment to help assess whether firms have sufficient capital to absorb losses.

Scenarios of the US unemployment rate rising by about 5.25 percentage points to 10% will be part the checks this year, as well as heightened stress in corporate loan markets and commercial real estate markets.

Thirteen of the largest and most complex bank holding companies, including JP Morgan, Goldman Sachs, will be subject to both a quantitative evaluation of their capital adequacy and a qualitative evaluation of their capital planning capabilities.

The central bank announced earlier this week that twenty one firms with less complex operations will no longer be subject to the qualitative portion of what's known as the Comprehensive Capital Analysis and Review (CCAR).

Six bank holding companies with large trading operations – Morgan Stanley, Goldman, Citi, Bank of America, JP Morgan and Wells Fargo - will also be required to factor in a global market shock as part of their scenarios.

Eight bank holding companies, State Street, BNY Mellon and the six listed above, will be required to incorporate a counterparty default scenario.

Banks are required to submit their capital plans and stress test results to the Fed by April 5.

The Fed will announce the results before the end of June.


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