The Federal Reserve Board uses stress tests to assess the resilience of the large banks that it regulates. It has now published details of the scenarios that it will use during its 2023 stress tests.
The 2023 stress tests will be expanded beyond their usual focus on specific scenarios to consider the impacts of multiple scenarios impacting at the same time.
The Federal Reserve Board says that 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. This stress test evaluates the resilience of these banks by estimating losses, net revenue, and capital levels - which provide a cushion against losses - under hypothetical recession scenarios that extend two years into the future.
In addition, banks with large trading operations will be tested against a global market shock component 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.
For the first time, this year's stress test will feature an additional exploratory market shock to the trading books of the largest and most complex banks, with firm-specific results released.
“This exploratory market shock will not contribute to the capital requirements set by this year's stress test and will be used to expand the Board's understanding of the largest banks' resilience by considering more than a single hypothetical stress event. The Board also will use the results of the exploratory market shock to assess the potential of multiple scenarios to capture a wider array of risks in future stress test exercises,” explains the Federal Reserve Board.
More details (PDF).