The Federal Reserve Board unveiled its hypothetical scenarios for the 2024 bank stress test, which aims to evaluate the resilience of large banks.
Also, for the first time, the board disclosed four hypothetical elements designed to examine different risks through its exploratory analysis of the banking system. The analysis will not affect bank capital requirements.
This year, 32 banks — including the Big Four US banks: JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc. and Wells Fargo & Co. — will be tested against a severe global recession with elevated stress in both commercial and residential real estate markets, as well as in corporate debt markets.
In the 2024 stress test scenario, the US unemployment rate increases 6.3 percentage points from the starting point of the scenario in the fourth quarter of 2023 to its peak of 10% in the third quarter of 2025. A rise in market volatility, widening corporate bond spreads and a collapse in asset prices, including a 36% decline in house prices and a 40% decline in commercial real estate prices, will accompany the sharp decline in economic activity.
Also, banks with large trading operations will be tested against a global market shock component that stresses their trading, private equity and certain other fair-valued positions. Large banks that have substantial trading or custodial operations will be tested against the default of their largest counterparty.
In the 2024 exploratory analysis, two of the four hypothetical elements include funding stresses that result in a rapid repricing of a large proportion of deposits at large banks, with each element having a different set of interest rate and economic conditions. As part of the analysis, 20% of non-interest-bearing deposits shift into time deposits, leading banks to increase their reliance on wholesale funding and pay market rates on a larger share of their liabilities.
The other two elements include two sets of market shocks applicable to the largest and most complex banks. The shocks hypothesize the failure of five large hedge funds, with each under a different set of financial market conditions, including expectations of reduced global economic activity with a negative outlook for long-term inflation, as well as expectations of severe recessions in the US and other countries.
The Fed Board will publish the aggregate results of its exploratory analysis and the annual stress test results in June.
Some of the other companies subject to the 2024 stress test are Ally Financial Inc., American Express Co., Bank of New York Mellon Corp., Barclays US LLC, BMO Financial Corp., Capital One Financial Corp., Charles Schwab Corp., Citizens Financial Group Inc., Credit Suisse Holdings (USA) Inc., Deutsche Bank AG unit DB USA Corp., Discover Financial Services, Fifth Third Bancorp and Goldman Sachs Group Inc.
HSBC North America Holdings Inc., Huntington Bancshares Inc., KeyCorp, M&T Bank Corp., Morgan Stanley, Northern Trust Corp., PNC Financial Services Group Inc., RBC US Group Holdings LLC, Regions Financial Corp., Santander Holdings USA Inc., State Street Corp., TD Group US Holdings LLC, Truist Financial Corp., UBS Americas Holding LLC and US Bancorp are also subject to the 2024 test.
