Banking regulators unveiled new stress test requirements for the largest financial institutions, including a series of hypothetical global market shocks six banks will be required to face.
Stress tests are conducted annually by the Federal Reserve, Office of the Comptroller of the Currency (OCC), and Federal Deposit Insurance Corporation (FDIC). The regulators consult each other to develop their scenarios in accordance with the requirements of the Dodd-Frank Act.
Of 23 large banks with a global footprint being tested, 11 will be required to conduct additional tests to gauge their response to a global market shock, a counterparty default, and/or exploratory market shock, the Fed announced in its press release Thursday. The results of these tests will not contribute to the capital requirements set by this year’s stress test but instead be used by the Fed to assess a wider array of risks for use in future tests.
“The board’s stress test evaluates the resilience of large banks by estimating losses, net revenue, and capital levels—which provide a cushion against losses—under hypothetical recession scenarios that extend two years into the future,” the Fed said.
The six institutions that will conduct stress tests in all three global market scenarios are Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, and Wells Fargo.
Institutions required to conduct two stress tests for severe global market shocks are Bank of New York Mellon, Barclays US, Credit Suisse Holdings (USA), Deutsche Bank USA, and State Street Corp.
The results of the stress tests are expected to be published by the end of the second quarter and will inform large bank capital requirements to be announced during the third quarter.
In its press release, the OCC acknowledged the data gathered during the tests provides “forward-looking information used in bank supervision and assist[s] the agency in assessing a covered institution’s risk profile and capital adequacy.”
The FDIC has until Feb. 15 to release its 2023 stress testing scenarios.