Federal Reserve Board Releases Hypothetical Scenarios for Annual Stress Test
2025-02-05 21:30 ET – WASHINGTON, D.C. – The Federal Reserve Board (FRB) today released the hypothetical scenarios that will be used in its annual stress test of the largest banks in the United States. The stress test is designed to assess the resilience of the financial system to a severe economic downturn.
The scenarios for the 2025 stress test include:
- A severe global recession, with a sharp decline in economic growth and a rise in unemployment.
- A sharp decline in asset prices, including a 50% decline in the S&P 500 index and a 30% decline in commercial real estate prices.
- A significant increase in credit losses, with a 10% increase in the default rate on loans to businesses and a 5% increase in the default rate on loans to households.
- A loss of confidence in the financial system, leading to a run on deposits and a sharp increase in short-term funding costs.
The FRB said that the scenarios are designed to be “severely adverse” but are not intended to be a prediction of the future. The scenarios are based on a combination of historical data and economic models, and they are designed to test the resilience of banks to a range of potential risks.
The stress test will be conducted in two phases. In the first phase, banks will submit their capital plans to the FRB. In the second phase, the FRB will use the hypothetical scenarios to assess the adequacy of banks’ capital plans.
The results of the stress test will be released in the summer of 2025. The FRB will use the results of the stress test to determine whether banks need to make changes to their capital plans.
The stress test is an important tool for ensuring the safety and soundness of the financial system. By testing banks’ resilience to severe economic downturns, the FRB can help to prevent future financial crises.
Federal Reserve Board releases the hypothetical scenarios for its annual stress test
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