Federal authorities reveal potential financial stress test situations for the year 2025
Federal Reserve Unveils Annual Stress Test Scenarios for Large Banks
The Federal Reserve has released its annual stress test scenarios for large banks, with modifications aimed at reflecting the current economic environment and addressing concerns about inflation, tightening monetary policy, and potential economic slowdown or recession.
According to the exploratory analysis, the test features severe market volatility, widening corporate bond spreads, and a collapse in asset prices. The international section of the stress test considers recession in four countries or country blocs. The stress test includes a U.S. unemployment rate jump of nearly 5.9 percentage points, to 10%.
This year, 22 banks will be tested, compared to 32 last year. Banks with major trading operations face additional stress tests. The stress test includes 28 variables, unchanged from last year's.
The Fed plans to reduce stress test volatility and improve model transparency this year. In line with this, the Fed's exploratory analysis has two new elements: testing bank resilience to non-bank financial sector shocks and a market shock applied to the largest and most complex banks.
The results of the main stress test and the exploratory scenarios will be published in June. The Fed will open a public comment process on its changes to the stress test. The American Bankers Association, the Bank Policy Institute, the Ohio Chamber of Commerce, the Ohio Bankers League, and the Chamber of Commerce of the United States of America have sued the Fed's board of governors.
Analysts predict modest headwinds for JPMorgan and Bank of America, with potentially less benefits from lower accumulated other comprehensive income. Capital markets are expected to perform better than last year, particularly for Morgan Stanley and Goldman Sachs.
Though the specific details of the changes in the Federal Reserve's 2022 annual stress test scenarios compared to 2021 are not fully detailed in the provided search results, it is common for the Fed to update its stress test scenarios annually to reflect evolving economic conditions, risks, and regulatory priorities.
The stress test scenarios for 2025 extend to the first quarter of 2028. Some of the banks tested this year include American Express, Bank of America, BNY, Barclays US, BMO, Capital One, Charles Schwab, Citi., DB USA Corporation, Goldman Sachs, JPMorgan Chase, M&T Bank, Morgan Stanley, Northern Trust, PNC, RBC US Group Holdings, State Street, TD Group US Holdings, Truist, UBS Americas Holding, U.S. Bank, and Wells Fargo.
For precise scenario details and quantitative changes in assumptions, such as GDP shocks, unemployment rates, and market declines, the Federal Reserve’s official 2022 and 2021 stress testing publications would be the authoritative source.
[1] Source: Federal Reserve's stress testing publications and general knowledge about typical practice. [3] Source: Analyst reports and bank statements.
- Amidst the economic uncertainties, these large banks must demonstrate their finance-related resilience as they face the stress test scenarios, which include severe market volatility and potential economic slowdown.
- The exploration of non-bank financial sector shocks and the application of market shocks to the largest and most complex banks aim to assess the overall health of the business sector, considering the intricate interconnections between banks and other financial institutions.
