The Fed stress test, formally the Dodd-Frank Act Stress Test (DFAST) and historically paired with the Comprehensive Capital Analysis and Review (CCAR), is a supervisory exercise run by the Board of Governors of the Federal Reserve System. It projects each large bank holding company's revenues, losses, and capital ratios over a nine-quarter horizon under hypothetical scenarios designed by the Fed, typically a "baseline" and a "severely adverse" scenario involving sharp rises in unemployment, falls in GDP, equity market crashes, and stress in real estate and corporate credit.
The tests originated in 2009 with the Supervisory Capital Assessment Program (SCAP), launched by the Fed and Treasury during the global financial crisis to restore market confidence in the 19 largest U.S. bank holding companies. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 made stress testing a permanent annual requirement for the largest firms.
Key features:
- Scope: Applies primarily to bank holding companies with $100 billion or more in assets, with the most rigorous treatment reserved for global systemically important banks (G-SIBs) such as JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs, and Morgan Stanley.
- Outputs: Projected losses on loans and trading positions, pre-provision net revenue, and post-stress capital ratios, especially the Common Equity Tier 1 (CET1) ratio.
- Capital implications: Results feed into each firm's Stress Capital Buffer (SCB), a framework adopted in 2020 that sets firm-specific capital requirements above regulatory minimums and constrains dividends and share buybacks if breached.
Tailoring rules introduced under the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 reduced testing frequency for mid-sized banks. The tests have been criticized for scenario predictability and for missing risks like the rapid deposit outflows that felled Silicon Valley Bank in March 2023, prompting Vice Chair for Supervision Michael Barr's "Holistic Capital Review" and proposals to revise the framework.
Example
In June 2024, the Federal Reserve announced that all 31 large banks tested, including JPMorgan Chase and Goldman Sachs, would remain above minimum capital requirements under a severely adverse scenario featuring a 10% unemployment rate and a 36% drop in house prices.
Frequently asked questions
Generally U.S. bank holding companies with $100 billion or more in consolidated assets, with the largest and most complex firms—particularly G-SIBs—subject to the most stringent annual testing.
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