Fed vice chairman discusses stress testing adaptability due to Covid-19 pandemic

Federal Issues Federal Reserve Stress Test Covid-19

On June 19, Federal Reserve Vice Chair for Supervision Randal K. Quarles spoke at a meeting of the Women in Housing and Finance regarding adjustments to the Fed’s periodic stress testing of large banks in the wake of Covid-19. Quarles explained that because the Fed lacked the time and comprehensive data to run a complete and updated Covid-19 event stress test this year, the Fed made the decision to continue with the “severely adverse scenario” begun in February 2020, while also performing a new “sensitivity analysis.” The sensitivity analysis considers three distinct downside risk paths for the economy—a rapid recovery, a slower recovery, and a W-shaped double-dip recession.

As in past years, the Fed intends to disclose annual stress test results using the February 2020 scenario (run against bank exposures as of December 2019), which will include both firm-specific and aggregate results. Quarles also indicated the Fed would be disclosing some results from the new sensitivity analysis. According to Quarles, these results will not be firm-specific, but will be “aggregated across banks comparing how the banking system as a whole would fare under the three distinct views of the future.” The Fed also plans to “move ahead and provide all banks subject to stress testing with a stress capital buffer requirement based on the February 2020 scenario, under [the Fed’s] new approach integrating stress testing with capital requirements.” Once banks determine their final plans, the Fed will publicly release the final capital requirements for each individual bank later this year before they take effect in the fourth quarter as planned. Quarles also noted that additional policy actions, if warranted, may be taken in the coming months as the Fed continues to monitor the economic conditions.