In addition to a deep recession, soaring unemployment, a stock market crash, and collapsing housing prices, banks must prepare to withstand oil prices at $110 a barrel, federal regulators said Thursday.
Those factors are part of the worst-case scenario for the “stress tests” that regulators will impose on big banks. The stress tests simulate negative conditions to gauge whether banks are adequately prepared and have sufficient capital to weather a crisis.
The Federal Reserve, Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency released the details for the 2015 stress tests Thursday, and the “severely adverse scenario” includes gross domestic product falling by 4.5 percent and unemployment rising to 10 percent. Equity markets fall by 60 percent, with housing prices cratering by 25 percent.
The 2015 scenario also includes two new factors that haven’t been part of the past stress tests, which began in 2009. Those are a 5-percentage-point spike in corporate bond yields, and a jump in the price of Brent crude oil to $110 a barrel, up from the current $82.
In all, the scenario would not be far off from what occurred during the 2008 financial crisis, which ultimately drove unemployment to 10 percent and involved almost a one-third drop in housing prices and a stock market crash of over 50 percent.
The bank regulators will apply the stress tests to 31 bank-holding companies with more than $50 billion in assets, including for the first time Deutsche Bank Trust Corp. If the banks fail the tests, the regulators can halt their plans for dividend payments or stock buybacks.
The stress tests are part of a set of actions the bank regulators take to make sure that banks are adequately prepared to withstand a shock and also to fail without bringing down the rest of the financial system.
Those exercises took on added seriousness in August when the Fed and FDIC rejected 11 big banks’ plans for “living wills,” plans made ahead of time specifying how the companies would safely go bankrupt during a failure. Those banks have to resubmit more credible plans or face a series of repercussions that become more serious the longer they delay.
Since the stress tests were first conducted in 2009, the banks tested have raised their aggregate capital from $460 billion to $971 billion as of late 2013, according to the Fed. As a share of total assets, capital has more than doubled from 5.3 percent to 11.1 percent.
Banks must submit their capital plans to the regulators by Jan. 5 and will undergo the stress tests later in 2015.
