By Steve Goldstein
The Federal Reserve on Friday announced the conditions for the annual stress test simulations — and they are actually easier than what lenders experienced last year.
A tweet from the Fed shows this quite clearly. The unemployment rate spike in the central bank’s “severely adverse” scenario isn’t of the same magnitude as what lenders experienced when the COVID-19 pandemic virtually shut down the U.S. economy.
The Fed’s severely adverse scenario shows an unemployment rate rising 4% and the economy contracting 3%. The unemployment rate last year rose from 3.5% in February to 14.8% in April, and the U.S. economy fell 9% in the second quarter from the year-earlier quarter.
This year’s stress test looks at what would be a global downturn with substantial stress in commercial real estate and corporate debt markets.
The stress tests are an annual tradition springing from the passage of the Dodd-Frank bank reform law after the 2008 financial crisis. They are designed to assess the resilience of the top 19 banks that operate in the U.S. — such as Bank of America /zigman2/quotes/200894270/composite BAC -0.58% , Citi /zigman2/quotes/207741460/composite C -0.74% , and JPMorgan Chase /zigman2/quotes/205971034/composite JPM -1.37% — to severe recessions. Other big banks such as Ally Financial /zigman2/quotes/206227672/composite ALLY -3.34% and BNP Paribas’ /zigman2/quotes/206351084/delayed FR:BNP -0.41% U.S. operations are on a two-year stress-test cycle and can opt into this test.
The Fed can limit or forbid stock buybacks and dividends depending on how well banks stack up.