February 12, 2021

Federal Reserve Board releases hypothetical scenarios for its 2021 bank stress tests

For release at 9:15 a.m. EST

The Federal Reserve Board on Friday released the hypothetical scenarios for its 2021 bank stress tests. Last year, the Board found that large banks were generally well capitalized under a range of hypothetical events but due to continuing economic uncertainty placed restrictions on bank payouts to preserve the strength of the banking sector.

The Board's stress tests help ensure that large banks are able to lend to households and businesses even in a severe recession. The exercise evaluates the resilience of large banks by estimating their loan losses and capital levels—which provide a cushion against losses—under hypothetical recession scenarios that extend nine quarters into the future.

"The banking sector has provided critical support to the economic recovery over the past year. Although uncertainty remains, this stress test will give the public additional information on its resilience," Vice Chair for Supervision Randal K. Quarles said.

The hypothetical recession begins in the first quarter of 2021 and features a severe global downturn with substantial stress in commercial real estate and corporate debt markets. The U.S. unemployment rate in the "severely adverse" scenario rises by 4 percentage points from its starting point, reaching a peak of 10-3/4 percent in the third quarter of 2022. Gross domestic product falls 4 percent from the fourth quarter of 2020 through the third quarter of 2022, with asset prices dropping sharply, including a 55 percent decline in equity prices. The chart below shows the path of the unemployment rate:

This is a line chart titled Unemployment rate in the severely adverse scenario, 2014:Q1-2024:Q1. The x axis ranges from 2014:Q1 to 2024:Q1. The y axis ranges from 3 to 15 percent. The data are quarterly. There are two variables charted on the plot. The first variable, labeled Actual, the unemployment rate for the third quarter of 2020 is based on the forecasts of professional forecasters, is designated by a blue solid line. This variable begins at about 7 percent in 2014:Q1. It slowly declines until it rapidly peaks at 13 percent in 2020:Q2. It then declines to end at about 7 percent in 2020:Q3. The second, variable, labeled Severely adverse, is designated by an orange dotted line. The variable begins at about 7 percent in 2020:Q3, but increases to about 11 percent in 2022:Q2. It then declines and ends at about 7.5 percent in 2024:Q1.

This year, 19 large banks will be subject to the stress test. Smaller banks are on a two-year stress test cycle but can opt in to this year's test and must do so by April 5. Banks with large trading operations will be tested against a global market shock component that stresses their trading, private equity, and other fair value positions. Additionally, banks with substantial trading or processing operations will be tested against the default of their largest counterparty. A table below shows the components that would apply to each bank, as well as identifying which banks are on a two-year cycle, based on data as of September 30, 2020.

The scenarios are not forecasts and the severely adverse scenario is significantly more severe than most current baseline projections for the path of the U.S. economy under the stress testing period. They are designed to assess the strength of large banks during hypothetical recessions, which is especially appropriate in a period of uncertainty. Each scenario includes 28 variables covering domestic and international economic activity.

Bank Subject to 2021 stress test Can opt in to 2021 stress test Subject to global market shock Subject to counterparty default
Ally Financial Inc.   X    
American Express Company   X    
Bank of America Corporation X   X X
The Bank of New York Mellon Corporation X     X
Barclays US LLC X   X X
BMO Financial Corp.   X    
BNP Paribas USA, Inc.   X    
Capital One Financial Corporation X      
Citigroup Inc. X   X X
Citizens Financial Group, Inc.   X    
Credit Suisse Holdings (USA), Inc. X   X X
DB USA Corporation X   X X
Discover Financial Services   X    
Fifth Third Bancorp   X    
The Goldman Sachs Group, Inc. X   X X
HSBC North America Holdings Inc. X   X X
Huntington Bancshares Incorporated   X    
JPMorgan Chase & Co. X   X X
KeyCorp   X    
M&T Bank Corporation   X    
Morgan Stanley X   X X
MUFG Americas Holdings Corporation   X    
Northern Trust Corporation X      
The PNC Financial Services Group, Inc. X      
RBC US Group Holdings LLC   X    
Regions Financial Corporation   X    
Santander Holdings USA, Inc.   X    
State Street Corporation X     X
TD Group US Holdings LLC X      
Truist Financial Corporation X      
UBS Americas Holding LLC X      
U.S. Bancorp X      
Wells Fargo & Company X   X X
Last Update: February 12, 2021