Stress Test Scenarios - Federal Reserve

1 Stress Test Scenarios February BOARD OF GOVERNORS OF THE Federal Reserve SYSTEM Stress Test Scenarios February BOARD OF GOVERNORS OF THE Federal Reserve SYSTEM This and other Federal Reserve Board reports and publications are available online at To order copies of Federal Reserve Board publications offered in print, see the Board s Publication Order Form ( ) or contact: Printing and Fulfillment Mail Stop K - Board of Governors of the Federal Reserve System Washington, DC 55 (ph) -45 -3 45 (fax) -7 8-5886 (email) iii Contents Introduction .. Supervisory Scenarios .. 3 Baseline and Severely Adverse Scenarios .

2 3 Global Market Shock Component for Supervisory Severely Adverse Scenario .. 5 Counterparty Default Component for Supervisory Severely Adverse Scenario .. 7 Variables for the Supervisory Scenarios .. 9 Introduction The Federal Reserve Board s (Board) Stress tests help ensure that large banks are able to lend to households and businesses even in a severe recession. The Stress tests evaluate the resilience of large banks by estimat-ing their losses, revenues, expenses and resulting capital levels which provide a cushion against losses under hypothetical recession Scenarios into the future.

3 Last year, the Board ran two separate Stress tests to assess the strength of large banks. The Board found that large banks were generally well capitalized under a range of hypothetical events. But due to continuing uncertainty from the COVID event, the Board bank holding companies (BHCs) and intermediate holdingcompanies of foreign banking organizations (IHCs) with$ billion or more in assets are subject to the Board s super-visory Stress test rule ( CFR 5 , subpart E) and the capitalplan rule ( CFR ). In addition, certain BHCs andIHCs, savings and loan holding companies, and state memberbanks must comply with the Board s company-run Stress test rules( CFR 38, subpart P; and CFR 5 , subparts B and F).

4 Placed restrictions on bank payouts to preserve the strength of the banking sector. The hypothetical Scenarios that banks are tested against are described in detail in this publication. See the box Recent Updates to Capital Planning Requirements on the Board's recent regulatory actions on Stress test requirements. The following 9 firms are required to participate in Dodd-Frank Act Stress Test (DFAST) : Bank of America Corpo-ration; The Bank of New York Mellon Corporation; Barclays US LLC; Capital One Financial Corporation; Citigroup Inc.; Credit Suisse Holdings (USA), Inc.; DB USA Corporation; The Goldman Sachs Group, Inc.

5 ; HSBC North America Hold-ings Inc.; JPMorgan Chase Morgan Stanley; Northern Trust Corporation; The PNC Financial Services Group, Inc.; State Street Corporation; TD Group US Holdings LLC; Truist Financial Corporation; UBS Americas Holding LLC; Bancorp; Wells Fargo & Company. In addition to DB USA Corporation, DWS USA Corporation, a second interme-diate holding company subsidiary of Deutsche Bank AG, is subject to DFAST . Box 1. Recent Updates to Capital Planning RequirementsIn 2019, the Board finalized a framework that sortslarge banking organizations into one of four catego-ries of prudential standards based on their risk pro-files (the tailoring rule ).

6 1 The most stringent pruden-tial standards apply under Category I, and the leaststringent prudential standards apply under Category January 2021, the Board finalized a rule to updatecapital planning requirements for large banks to beconsistent with the tailoring Board's capitalplanning requirements for large banks help ensurethey plan for and determine their capital needs undera range of different rule removes the company-run Stress testrequirement for banking organizations subject to Cat-egory IV standards. Therefore, banking organizationssubject to Category IV standards are not required tocalculate forward-looking projections of capital underscenarios provided by the rule also aligns the frequency of the calculationof the Stress capital buffer requirement with the fre-quency of the supervisory Stress test (that is, bothwould occur every other year for banking organiza-tions subject to Category IV standards).

7 The ruleallows a banking organization subject to Category IVstandards to elect to participate in the supervisorystress test in a year in which the banking organizationwould not otherwise be subject to the supervisorystress test, and to receive an updated Stress capitalbuffer requirement in that year. This year bankingorganizations subject to Category IV standards arenot subject to a supervisory Stress test, but they mayelect, by April 5, 2021, to participate in the FederalReserve s 2021 supervisory Stress , the rule changes certain assumptions aboutmaterial business plan changes in company-runstress tests and applies capital planning and stresscapital buffer requirements to certain savings andloan holding 84 FR 59032 (Nov.)

8 1, 2019).2 See 86 FR 7927 (Feb. 3, 2021).IntroductionThe Federal Reserve Board s (Board) Stress tests helpensure that large banks are able to lend to householdsand businesses even in a severe recession. The stresstests evaluate the resilience of large banks by estimat-ing their losses, revenues, expenses and resultingcapital levels which provide a cushion against losses under hypothetical recession Scenarios into the year, the Board ran two separate Stress tests toassess the strength of large banks. The Board foundthat large banks were generally well capitalized undera range of hypothetical events.

9 But due to continuinguncertainty from the COVID event, the Boardplaced restrictions on bank payouts to preserve thestrength of the banking hypothetical Scenarios that banks are testedagainst are described in detail in this the box R ecent Updates to Capital PlanningRequirements on the Board's recent regulatoryactions on Stress test bank holding companies (BHCs) and intermediate holdingcompanies of foreign banking organizations (IHCs) with$100 billion or more in assets are subject to the Board s super-visory Stress test rule (12 CFR 252, subpart E) and the capitalplan rule (12 CFR ).

10 In addition, certain BHCs andIHCs, savings and loan holding companies, and state memberbanks must comply with the Board s company-run Stress test rules(12 CFR 238, subpart P; and 12 CFR 252, subparts B and F).2 The following 19 firms are required to participate in Dodd-Frank Act Stress Test (DFAST) 2021: Bank of America Corpo-ration; The Bank of New York Mellon Corporation; BarclaysUS LLC; Capital One Financial Corporation; Citigroup Inc.;Credit Suisse Holdings (USA), Inc.; DB USA Corporation;The Goldman Sachs Group, Inc.; HSBC North America Hold-ings Inc.; JPMorgan Chase Morgan Stanley; NorthernTrust Corporation; The PNC Financial Services Group, Inc.