12 Feb FRB and OCC – Release hypothetical, financial markets, and economic scenarios for its 2021 bank stress tests
February 12, 2021
Baseline Scenario Highlights
Baseline scenario characterized by moderate expansion, where the horizon period is 13 quarters. US real GDP averages 4% in 2021, slows to 2.5% in 2022, 2.25% at end of scenario. Unemployment exhibits a gradual decline, 6.75% at the end of 2020, to 4.5% at the scenario end. The yield curve steepens over the scenario horizon. A gradual rise in short and long-term Treasuries: to 0.75% for short-term treasuries by scenario-end; and to near 2% for long-term. Equity market volatility, VIX sees a decline from 32.75 in 2021 to 26.5 end of the horizon.
Severely Adverse Scenario Highlights
DFAST Severely adverse scenario includes the severe global recession, with acute stress in CRE and corporate debt markets; in addition, asset prices experience sharp declines. Spread on yields between corporate bonds, 10-yr Treasury widens to near 6% (3Q 2021). US real GDP falls 4% from the pre-recession peak, with unemployment reaching 10.75%. CRE price declines mirror industries and property categories affected by COVID-19. Globally, severe recessions in EU, UK, Japan; major deceleration in developing Asia,(nominal GDP-weighted aggregate of China, India, S Korea, Hong Kong and Taiwan). Finally, firms subject to global market shock, to use exposures, as at. October 9, 2020.
Required Covered Institutions
The stress testing rule requires covered firms to conduct tests every other year. Firms consolidated per BHC, are required to submit annually by the FRB. Cat III banks not required to submit stress testing data in the 2021 DFAST reporting year. There are 19 large banks subject to stress test this year; smaller banks are on a two-year stress test cycle but can opt into this year’s test and must do so by April 5, 2021. Banks with large trading operations will be tested against the global market shock component that stresses their trading, private equity, and other fair value positions. Banks with substantial trading, processing operations test against the default of largest CP.
Company-run stress tests submitted by April 5, 2021.