Sound The Trumpet : Fed Lays Out Scenarios for 2015 Bank Stress Tests

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“Fed Lays Out Scenarios for 2015 Bank Stress Tests”
by Reuters
October 24th, 2014

An eagle tops the U.S. Federal Reserve building's facade in Washington, July 31, 2013.

The tests were introduced after the 2007-09 financial crisis, and are an increasingly important part of the Fed's toolkit to make sure the largest banks stay safe, and to avoid a repeat of costly taxpayer bailouts.

Overall, however, the Fed said its "severely adverse" scenario was largely similar to the one it had used in its 2014 run of the so-called stress tests, mandatory for any bank with assets of more than $50 billion.

The Fed can bar a bank from raising shareholder payouts such as dividends or share buybacks if it fails to show it can survive the three increasingly dire hypothetical economic scenarios used in the stress tests.

Reuters reported last week that the Fed is also considering using the tests as one of the tools it could use to prevent a buildup of excessive financial risk in the system, though there was no sign it would do so in 2015.

The Fed's medium-severe, or adverse scenario, assumed a pickup in U.S. inflation and a resulting yield curve that was higher and flatter than in the baseline scenario, making it different from last year's adverse scenario.

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