Econintersect: The Federal Reserve Board released the results of the annual stress tests of the 30 largest U.S. banks to assess how well each was prepared to weather either a moderate recession (adverse stress) or a severe recession (severely adverse stress). Only one bank suffered an outright failure under the most adverse scenario stress, Zions Bank of Utah.
The most severe tests for 2014 were summarized by Sital S. Patel atMarketWatch:
This year’s “severely adverse” economic scenario will include these parameters: unemployment rate peaking at 11.25% in mid-2015, a decline in real U.S. GDP of nearly 4.75% through the end of 2014, as well as a 50% decline in equity prices and a 25% decline in home prices.
The Fed gave the following changes for the current stress tests from prior tests:
- In addition to the 18 institutions that have been part of the stress tests since 2009, an additional 12 firms with assets greater than $50 billion were included this year;
- The Federal Reserve used independent projections of balance sheet and risk-weighted asset growth rather than depending on the firms’ calculation for these categories as was done in prior years, improving the comparability and robustness of the results;
- The tests included an estimate of losses that could result if a financial institution’s largest counterparty were to default unexpectedly. This scenario was applied to eight firms with substantial trading or custodial operations. The counterparty default scenario is part of the global trading shock, which is applied to six firms with large trading operations; and
- The Federal Reserve in this year’s test began to phase in the revised capital framework approved by the Board in July 2013. The Federal Reserve calculated each firm’s capital ratios in accordance with the capital requirements that will be in effect during each projected quarter.
The following graphic from the Fed report summarizes the bank-by-bank results for the severely adverse stress test (with annotations added by Econintersect):
