Fed releases 2023 stress test scenarios for banks, including extra new shock for big firms (updated)

Citizens Financial (Delaware)

09/02/2023 21:58

(Adds detail and context)
    By Pete Schroeder
       WASHINGTON, Feb 9 (Reuters) - The U.S. Federal Reserve
on Thursday released the hypothetical economic strains they will
use to test the strength of big bank finances in its 2023 stress
test, and floated the possibility of using multiple scenarios in
the future.
    In a statement, the Fed said this year's test will include a
new "exploratory market shock" for the eight largest banks,
which will not affect their capital requirements but will
further detail their resilience, as well as help the Fed decide
whether it should pursue multiple test scenarios in future
years.
    The annual exam of bank health, in which the Fed sees how
banks perform against a potential severe economic downturn, has
become a critical event for large firms. How well they perform
directly dictates how much capital they need to set aside as a
cushion. 
    The 2023 version will include a severe recession with
heightened stress in both commercial and residential real estate
markets and corporate debt markets. Banks with large trading
operations will also be tested against a global market shock, as
the Fed has done in years prior.
    But new this year is an extra market shock applied to the
eight largest firms, including JPMorgan Chase, Goldman Sachs,
and Citigroup. The Fed did not detail what that market shock
would look like, but noted it would not contribute to a firm's
capital requirements.
    Instead, the results of that test are meant to be
educational, including helping the Fed determine whether it
could bolster future tests by applying multiple scenarios to
companies to capture a wider array of risks.
    The 2023 test marks the first under Fed Vice Chair for
Supervision Michael Barr, who had previously floated multiple
scenarios as a way to better gauge such risks.
 (Reporting by Pete Schroeder; Editing by Chris Reese and
Jonathan Oatis)
 ((Pete.Schroeder@thomsonreuters.com; 202-310-5485;))