Federal Reserve Board releases hypothetical scenarios for its 2022 bank stress tests

February 10, 2022 / Source: FRB

The Federal Reserve Board on Thursday released the hypothetical scenarios for its annual bank stress tests, which help ensure that large banks are able to lend to households and businesses even in a severe recession. This year, 34 large banks will be tested against a severe global recession with heightened stress in commercial real estate and corporate debt markets.

The Board's stress tests evaluate the resilience of large banks by estimating losses, net revenue, and capital levels—which provide a cushion against losses—under hypothetical recession scenarios that extend more than two years into the future. The scenarios are not forecasts.

In the 2022 stress test scenario, the U.S. unemployment rate rises 5 3/4 percentage points to a peak of 10 percent over two years. The large increase in the unemployment rate is accompanied by a 40 percent decline in commercial real estate prices, widening corporate bond spreads, and a collapse in asset prices, including increased market volatility.

In addition to the hypothetical scenario, banks with large trading operations will be tested against a global market shock component that primarily stresses their trading positions. Moreover, banks with substantial trading or custodial operations will be tested against the default of their largest counterparty.

The table below shows the components of the test that apply to each bank, based on data as of September 30, 2021.

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2022 Stress Test Scenarios (PDF)