Fed Adds Coronavirus-Related Scenarios to Annual Bank Stress Tests

Jun 26, 2020Federal Regulation, News

As part of the Federal Reserve’s annual stress tests, it is also assessing large banks’ abilities to handle recession scenarios related to the COVID-19 pandemic. According to a press release announcing the results of its 2020 stress tests and additional analyses conducted in light of COVID-19, “in addition to its normal stress test, the Board conducted a sensitivity analysis to assess the resiliency of large banks under three hypothetical recessions, or downside scenarios, which could result from the coronavirus event. The scenarios included a V-shaped recession and recovery; a slower, U-shaped recession and recovery; and a W-shaped, double-dip recession.”

The ‘sensitivity analysis’ of banks’ resilience will help the Fed develop policies on stock buybacks, capital requirements, and dividends.

The analysis of worst-case scenarios “will help us judge whether banks would have enough capital if economic and financial conditions were to worsen,” said Randal Quarles, the Federal Reserve’s Vice Chair for Supervision, as reported by the Wall Street Journal. “We simply would not have been doing our jobs if we had just run the test using a scenario framed before the economy began to deteriorate.”

These results, and those from routine stress tests, were released June 25. The Fed will continue to use the original tests to form its capital-buffer requirements, but the sensitivity analysis will help to decide if banks can pay dividends or buy back their own stock.

“Should our assessment of the Covid event’s likely evolution change, of course, we will act expeditiously to resize the buffer or take other appropriate actions,” Quarles said.

Alternatively, many regulators in Europe have told banks to halt capital distributions. Quarles however, stated that he preferred a “more granular” way of determining if banks can buy their stock back, as “there aren’t as many folks in Europe who rely on dividend income for income as there are in the United States.”

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