Fed eyes trouble in commercial real estate, corporate debt in 2021 stress tests

WASHINGTON (Reuters) – The Federal Reserve on Friday unveiled the hypothetical recession it plans to test large banks against in its 2021 stress tests, which include “significant stress” in commercial real estate and corporate bond markets.

The scenarios also envision a global recession in which US unemployment climbs to 10.75%, economic growth falls 4%, and the stock market loses 55% of its value. Nineteen of the largest banks in the country are being tested this year. The results will be published sometime this summer.

“The banking sector made a decisive contribution to the economic recovery last year. While uncertainty persists, this stress test will provide the public with additional information about its resilience, ”Randal K. Quarles, vice chairman of supervision, said in a statement.

The 2021 test marks a return to normal for the Fed, which has resorted to test banks twice in the past year after it became clear that the economic impact of the coronavirus pandemic had indeed exceeded the sharp downturn envisaged in the Fed’s original test.

However, after both tests, the Fed found that the largest banks were still well capitalized despite severe downturns, and in December eased restrictions on capital withdrawals such as share buybacks.

The upcoming test will cover 19 of the country’s largest banks, although smaller companies now being tested on a biennial cycle could opt for this year’s test if they so choose. Ten of the banks with the largest trades will also be tested against a hypothetical global market shock, while twelve of the companies with significant trades or processing operations will also be tested against their largest counterparty failing to test their resilience.

Reporting by Pete Schroeder; Adaptation by Jonathan Oatis

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