Share This Page

Federal Reserve Board releases the hypothetical scenarios for its annual stress test

February 15, 2024 / Source: FRB

The Federal Reserve Board on Thursday released the hypothetical scenarios for its annual stress test, which helps ensure that large banks can lend to households and businesses even in a severe recession. Additionally, for the first time, the Board released four hypothetical elements designed to probe different risks through its “exploratory analysis” of the banking system. The exploratory analysis will not affect bank capital requirements.

The Board’s annual stress test evaluates the resilience of large banks by estimating losses, net revenue, and capital levelsā€”which provide a cushion against lossesā€”under hypothetical recession scenarios that extend two years into the future. This year, 32 banks will be tested against a severe global recession with heightened stress in both commercial and residential real estate markets, as well as in corporate debt markets. The scenarios are not forecasts and should not be interpreted as predictions of future economic conditions.

In the 2024 stress test scenario, the U.S. unemployment rate rises nearly 6-1/2 percentage points, to a peak of 10 percent. The increase in the unemployment rate is accompanied by severe market volatility, a widening of corporate bond spreads, and a collapse in asset prices, including a 36 percent decline in house prices and a 40 percent decline in commercial real estate prices. Large banks with substantial trading or custodial operations are also required to incorporate a counterparty default scenario component to estimate and report potential losses and capital effects associated with the unexpected default of the firm’s largest counterparty.

In addition, banks with large trading operations will be tested against a global market shock component that primarily stresses their trading and related positions. The global market shock component is a set of hypothetical stresses to a large set of risk factors reflecting market distress and heightened uncertainty.

The table below shows the components of the annual stress test that apply to each bank, based on data as of the third quarter of 2023.

This year’s exploratory analysis includes four separate hypothetical elements that will assess the resilience of the banking system to a wider range of risks. Two of the hypothetical elements include funding stresses that cause a rapid repricing of a large proportion of deposits at large banks. Each element has a different set of interest rate and economic conditions, including a moderate recession with increasing inflation and rising interest rates, and a severe global recession with high and persistent inflation and rising interest rates.

The other two elements of the exploratory analysis include two sets of market shocks that will be applied only to the largest and most complex banks. These shocks hypothesize the failure of five large hedge funds, with each under a different set of financial market conditions. Those conditions include expectations of reduced global economic activity with a negative outlook for long-term inflation, and expectations of severe recessions in the United States and other countries.

The exploratory analysis is distinct from the stress test and will explore additional hypothetical risks to the broader banking system, rather than focusing on firm-specific results. The Board will publish aggregate results alongside the annual stress test results in June 2024.

2024 Stress Test Banks1

Make Full Screen

BankSubject to global market shockSubject to counterparty default
Ally Financial Inc.  
American Express Company  
Bank of America CorporationXX
The Bank of New York Mellon Corporation X
Barclays US LLCXX
BMO Financial Corp.  
Capital One Financial Corporation  
The Charles Schwab Corporation  
Citigroup Inc.XX
Citizens Financial Group, Inc.  
Credit Suisse Holdings (USA), Inc.XX
DB USA CorporationXX
Discover Financial Services  
Fifth Third Bancorp  
The Goldman Sachs Group, Inc.XX
HSBC North America Holdings Inc.  
Huntington Bancshares Incorporated  
JPMorgan Chase & Co.XX
M&T Bank Corporation  
Morgan StanleyXX
Northern Trust Corporation  
The PNC Financial Services Group, Inc.  
RBC US Group Holdings LLC  
Regions Financial Corporation  
Santander Holdings USA, Inc.  
State Street Corporation X
TD Group US Holdings LLC  
Truist Financial Corporation  
UBS Americas Holding LLC  
U.S. Bancorp  
Wells Fargo & CompanyXX

1. The information listed in this table is based on third quarter 2023 data. Return to text

For media inquiries, please email [email protected] or call 202-452-2955.

Related Content

Dodd-Frank Act Stress Tests 2024

Last Update: February 15, 2024