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The Federal Reserve Board of Governors has announced the various scenarios it will use for its 2023 bank stress test. The test is an annual assessment designed to ensure that the nation’s banks have the resilience needed to meet the challenges posed by several hypothetical economic scenarios.
According to the Fed announcement, the latest bank stress test will assess how well 23 large banking institutions might cope with economic hypotheticals involving factors that include a “severe global recession with heightened stress in both commercial and residential real estate markets, as well as in corporate debt markets.”
The specifics of the 2023 hypothetical will assume an unemployment rate as high as 10 percent, and a recession that lasts for two years. Other negative stress factors will include a severe decline in asset prices, extreme market volatility, and a “significant widening of corporate bond spreads.”
Additional stress tests will be conducted for major banks that maintain sizable trading operations. That test will assess their ability to withstand a global market shock to see how it impacts their trading positions. For the largest banks, that assessment will be accompanied by an “exploratory market shock” to their trading books.
The Fed Board confirmed that the results of the exploratory market shock test will have no impact on any decisions it makes about capital requirements. Instead, that test is designed to provide new insight into those banks’ resilience and identify potential risks.
The annual bank stress test process assesses how well banks are positioned for a severe economic downturn. The Fed also noted in its announcement:
“The scenarios are not forecasts and should not be interpreted as predictions of future economic conditions.”