The nation’s biggest banks were required to submit their responses Monday to the Federal Reserve’s annual stress tests evaluating their resiliency in a hypothetical severe recession, but an official at the central bank recently said regulators would take the actual fallout from the coronavirus pandemic into account when assessing the banks’ health.
The Fed released its hypothetical stress test scenarios for 2020 on Feb. 6 to test whether 34 large banks with more than $100 billion in total assets -- including Bank of America Corp., Wells Fargo & Co., JPMorgan Chase & Co. -- had adequate capital and processes, so that they could continue lending to households and businesses, even during a severe recession. But on Friday Randal Quarles, the Fed's vice chairman for supervision, said that the board is adjusting the process to include the lenders’ performance in light of the coronavirus’ impact on the economy.
Quarles said in an April 10 webinar hosted by the University of Utah that the existing tests were “no longer a sufficient means by themselves to measure bank health.”
"In the regular order, stress testing of banks proceeds by our announcing the scenario early in the year of hypothetical financial stress, and then we determine how a bank’s portfolio would respond to that hypothetical stress and whether their capital levels are sufficient to allow them to continue to support the real economy through that stress,” Quarles said.
"We are going through an actual stress, currently. Some countries in the world have therefore announced that they have suspended their stress tests,” he said. “I think the right thing to do is for us to continue our stress tests, but as part of them to analyze how banks' portfolios are responding to real, current events, not just to the hypothetical event that we announced earlier this year."
The planned test included two imagined scenarios known as baseline and severely adverse that included a severe global recession with heightened stresses in corporate debt markets and commercial real estate, and additional pressure on leveraged loans for banks with large trading operations. The severely adverse scenario this year featured a severe global recession in which the U.S. unemployment rate would rise by 6.5 percentage points to 10 percent, but this scenario did not contemplate the economic damage being wrought by the current global pandemic.
Banks were required to submit their capital plans and the results of their stress tests to the Fed by April 6. The board plans to announce the results of these supervisory stress tests by June 30.
Quarles noted in the webinar that the stress test analysis would inform the Fed’s supervision and regulation of the financial sector going forward.
The statements from Quarles came a day after the Fed announced it took additional actions to provide up to $2.3 trillion in loans to support the economy. Officials said that funding is meant to assist households and employers of all sizes and bolster the ability of state and local governments to deliver critical services during the coronavirus pandemic.
Fed Chair Jerome Powell broadly addressed the board’s recent extraordinary actions to support the flow of credit during the pandemic and its intentions moving forward in an April 9 speech.
“We are deploying these lending powers to an unprecedented extent, enabled in large part by the financial backing from Congress and the Treasury,” Powell said. “We will continue to use these powers forcefully, proactively, and aggressively until we are confident that we are solidly on the road to recovery.”