November 15, 2012 / 10:11 PM / 5 years ago

U.S. Federal Reserve releases scenarios for bank stress tests

WASHINGTON, Nov 15 (Reuters) - The U.S. Federal Reserve released on Thursday the economic scenarios large banks will use in the next round of stress tests to determine how they would withstand a financial shock.

Regular stress tests are part of a more rigorous regime required by the 2010 Dodd-Frank financial oversight law. They are designed to that ensure banks have enough capital cushions and are not being overly aggressive in returning cash to shareholders.

The three scenarios would be used in company-run tests and tests conducted by the Fed for 19 of the biggest financial firms. Eleven additional firms would conduct tests using the baseline scenario, which uses projections based on private sector forecasts, and the severely adverse scenario.

Under the toughest hypothetical, banks would face recessions in Europe and Japan and a substantial slowdown in developing Asia. U.S. unemployment would spike up to almost 12 percent as the United States experienced a severe recession, the Fed said.

In addition to testing for economic stress scenarios, six big bank holding companies with significant trading activities will be checked for their ability to withstand a specific global market shock.

Those banks are Bank of America Corp, Citigroup Inc , Goldman Sachs Group Inc, JPMorgan Chase & Co , Morgan Stanley and Wells Fargo & Co.

The market shock scenario features a broad increase in interest rates, particularly long-term rates, which would knock down the value of bank holdings of investment grade bonds, such as Treasury securities.

The banks must submit their capital plans to regulators by Jan. 7.

During this round of stress tests, banks will get one opportunity to adjust plans to repurchase stock or boost dividends after the regulator’s initial assessment of the capital plan, the Fed said last week.

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