On February 5, the Fed released the hypothetical scenarios for its 2025 annual stress test with the aim to ensure that large banks could continue lending during severe economic downturns. This year’s test will assess 22 banks against a scenario of a severe global recession, featuring a significant rise in the U.S. unemployment rate to 10 percent, severe market volatility, and declines in both house and commercial real estate prices. Additionally, banks with significant trading operations must incorporate scenarios involving counterparty defaults and global market shocks. The Fed has also introduced an exploratory analysis with two hypothetical elements to evaluate the banking system’s resilience to broader risks, such as credit and liquidity shocks in the nonbank financial sector and the failure of large hedge funds. These exploratory scenarios will not only impact bank capital requirements, but also provide insights into systemic risks. The Fed plans to publish the results of both the stress test and exploratory analysis in June of this year and will work on reducing the volatility of stress test results and improving model transparency; the public comment process on comprehensive changes to the stress test will begin later this year.
