US Fed: Wall Street Bank Stress Test scenarios

February 10, 2023

The Federal Reserve of the United States is to create a hypothetical scenario of economic crisis. This is being done to check if the top-performing banks in the country shall survive the economic crisis. There are 23 big banks in the USA. And all the banks are to be put into a severe global recession. However, care will be taken so that they do not lose their capital to unsafe thresholds.

What is the plan?

The Federal Reserve is to introduce economic crisis scenarios. This includes “Market shocks” as well. The scenarios are being created based on the 2008 crisis. Corporate debt markets will also be created during the plan. During the test scenario, unemployment in the US is to increase by 10%.

What are the stress test scenarios for US Banks?

Interest rates, exchange rates, stock prices, and real estate prices, are some of the test scenarios of economic crisis to the banks. Also, the US Fed introduced a stress test that will focus on credit risk as well. The major focus is to be on the “Exploratory Market Shock”

What is Exploratory Market Shock?

Market shock is the disruption in the smooth functioning of the market. In other words, it is the disturbance caused to the market equilibrium. It usually occurs due to changes in supply and demand. In exploratory market shock, there are no changes in supply and demand. Supply and Demand are smooth and functioning normally. Disruption is caused artificially. For instance, increasing interest rates to create sudden market disruptions. While in reality, there is no need for such as economic move.

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