US Federal Reserve releases scenarios for 2024 bank “stress tests”

THE US Federal Reserve on Thursday (Feb 15) launched eventualities for its annual financial institution well being checks which is able to assess how nicely 32 massive lenders would fare underneath a extreme financial shock, together with a US jobless fee of 10 per cent and a collapse of actual property costs.

The Fed’s annual “stress tests,” launched following the 2007-to-2009 monetary disaster, dictate how a lot capital banks should be wholesome and the way a lot they will return to shareholders through share buybacks and dividends.

This yr’s checks will entice heightened scrutiny from buyers, analysts and regulators following the failure of three banks final yr, and as large banks are combating the Fed over proposed new capital hikes that they are saying are extreme.

The checks additionally come amid rising worries over lenders’ publicity to industrial actual property (CRE) after New York Community Bank final month reported losses on soured CRE loans, tanking its shares.

The CRE sector has confronted the dual challenges of financing difficulties amid excessive rates of interest and decrease workplace occupancy attributable to widespread adoption of distant work.

This yr’s most extreme state of affairs features a 36 per cent decline in home costs, in contrast with 38 per cent within the 2023 state of affairs, and a 40 per cent decline in industrial actual property costs, in step with final yr’s state of affairs. It additionally features a 6.5 proportion level enhance within the US unemployment fee, peaking at 10 per cent – additionally in step with final yr’s most extreme state of affairs.

Overall, the check is broadly in step with final yr’s.

This yr’s check may even for the primary time embody an extra “exploratory analysis” of the banking system, which is able to check lenders’ resilience to a wider vary of dangers than the normal checks. The exploratory evaluation is not going to have an effect on capital, the Fed stated.

The exploratory check will embody funding stresses that trigger a speedy repricing of a giant proportion of deposits at massive banks, much like the stress skilled by banks in March 2023. The largest and most complicated banks may even be examined towards a state of affairs wherein 5 massive hedge funds fail, the Fed stated.

The Fed stated it should publish combination stress check leads to June 2024. REUTERS