- Source: federalreserve.gov
Treliant’s Credit Solutions practice comprises former senior financial services risk executives and regulators who combine their extensive experience, qualifications, and know-how to assist financial institutions prepare to meet these Federal Reserve stress testing expectations. We provide financial institutions consulting support on credit risk management and governance, stress testing, climate scenario analysis, ESG policy and procedure development, loan workouts, and advice on portfolio risk-mitigation strategies.
The U.S. Federal Reserve has released the hypothetical economic strains they will use in the 2023 annual stress test the strength of large banks to lend to households and businesses even in a severe recession. This year, 23 banks will be tested against a severe global recession with heightened stress in both commercial and residential real estate markets, as well as in corporate debt markets.
In a statement, the Federal Reserve said the 2023 test will include a new “exploratory market shock” for the eight largest banks, which will not affect their capital requirements but will further detail their resilience, as well as help the Federal Reserve decide whether it should pursue multiple test scenarios in future years.
The 2023 stress test scenario will have the U.S. unemployment rate rises at nearly 6-1/2 percentage points growing to a peak at 10 percent. The increase in the unemployment rate is accompanied by severe market volatility, a significant widening of corporate bond spreads, and a collapse in asset prices. In addition, banks with large trading operations will be tested against a global market shock that primarily stresses their trading positions. The global market shock component is a set of hypothetical shocks to a large set of risk factors reflecting market distress and heightened uncertainty.
The results of that 2023 stress tests are meant to be educational, including helping the Federal Reserve determine whether it could bolster future tests by applying multiple scenarios to companies to capture a wider array of risks.