Fed adds three economic scenarios in this year's stress tests

• In light of the coronavirus pandemic, the Fed is adding three new scenarios to banks' annual stress tests, using its severely adverse scenario unveiled in February as a starting point to provide a sensitivity analysis for the three paths.
• In its original scenario, the unemployment rate was less severe than than the recent drop in employment and output in Q2, but more severe than what occurred in the debt markets.
• In a speech today, Fed Vice Chairman Randal Quarles said new scenarios are:

1. A rapid V-shaped recovery that regains much of output and employment declines by the end of the year;
2. A slower, more U-shaped recovery in which only a small share of lost output and employment is regains in 2020; and
3. A double-dip recession with a short-lived recovery followed by a severe drop in activity later this year due to a second wave of measures to contain the virus.

• Quarles emphasizes that "these are not forecasts by the Fed or me, only plausible scenarios that span the range of where many private forecasters think the economy could be headed."
• The Fed will disclose stress test results using the February 2020 scenario, providing company-specific and aggregate results.
• For the sensitivity analysis, it will provide key details about the three downside risk paths for the economy and targeted adjustments. It will not provide firm-specific results, but will provide results aggregated across banks that will compare how the banking system as a whole would fare under the three distinct views of the future.
• This year the Fed will disclose results of the Dodd-Frank Act stress tests ("DFAST") and the related Comprehensive Capital Analysis and Review ("CCAR") at the same time.
• The central bank plans to provide all banks subject to stress testing with a stress capital buffer requirement based on the February 2020 scenario, under its new approach integrating stress testing with capital requirements.
• Financials are leading the stock market down — (XLF -1.2%); Dow slides 0.8%, Nasdaq falls 0.3%, and S&P 500 falls 0.6%.
• By name, Bank of America (BAC -1.4%), Citigroup (C -2.1%), JPMorgan Chase (JPM -1.6%), Goldman Sachs (GS -0.8%), and Morgan Stanley.
• The regional banks fall even further; (KRE -2.6%).
• By name, PNC Financial (PNC -2.6%), Truist (TFC -2.4%), Regions Financial (RF -2.6%), Huntington Bancshares (HBAN -2.5%), and Citizens Bancshares are among banks undergoing the stress tests this year.