Fed releases hypothetical scenarios for annual stress test

By Ovunc Kutlu

ISTANBUL (AA) - The US Federal Reserve Board released hypothetical scenarios Thursday for its annual stress test, which helps ensure that large banks can lend to households and businesses even in a severe recession.

Thirty-two banks will be tested this year against a hypothetical severe global recession with high stress in commercial and residential real estate markets, including the corporate debt markets.

In the stress test scenario, the unemployment rate in the US rises nearly 6.5 percentage points to a peak level of 10%.

It will be accompanied by severe market volatility, a widening of corporate bond spreads and a collapse in asset prices, which include a 36% decline in house prices and a 40% decrease 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," the Fed said in a statement.

"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," it added.

The stress test assesses whether banks are sufficiently capitalized to absorb losses during stressful conditions while meeting obligations to creditors and continuing to be able to lend to households and businesses, according to the Fed.