Wall Street’s largest banks will face a hypothetical scenario of severe global recession with heightened stress in both commercial and residential real estate markets as part of an exercise by the Federal Reserve to test firms ability to withstand crises.
The central bank will examine the ability of the 23 biggest US lenders to weather crisis conditions without degrading their capital to dangerous levels. For the first time, the so-called stress test will feature an “exploratory market shock” to the trading books of the largest and most complex banks, the regulator said.
“This exploratory market shock will not contribute to the capital requirements set by this year’s stress test and will be used to expand the Board’s understanding of the largest banks’ resilience by considering more than a single hypothetical stress event,” the regulator said in a statement.
This tests, which will also involve changes in corporate debt markets, are not forecasts and should not be interpreted as predictions of future economic conditions, the Fed said.
Specifically, under the 2023 stress test scenario, the US unemployment rate will rise to 10%. The tests were put in place after the 2008 financial crisis to ensure the US banking system could withstand the next crisis.
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