Fed To Add COVID-19 as Essential New Element to Bank Stress Tests
The Federal Reserve (Fed) announced that it is modifying this year's stress test to reflect how banks have performed during the COVID-19 pandemic. In an online discussion hosted by the University of Utah, Randal Quarles (Quarles), the Vice Chairman for Supervision of the Fed, indicated that it is amending its annual stress tests for banks for 2020. Quarles opined “[T]he right thing to do is for us to continue our stress tests but as part of them to analyze how banks’ portfolios are responding to real, current events, not just to the hypothetical event that we announced earlier this year.”
The annual stress tests conducted by the Fed were designed to gauge how banks would respond to certain economic factors, including a stock market decline, oil prices decreasing, unemployment rising, loan defaults rising, or a combination of any of the above. The statement by Quarles appears to indicate that the current economic downturn resulting from COVID-19 may be more severe than what the Fed had contemplated in its stress tests. However, no specific details have yet been provided by the Fed on how they are going to incorporate COVID-19 into the stress testing process.
The current approach by the Fed to amend the 2020 stress tests is in stark contrast with some overseas institutions, most notably that of the Bank of England (BOE). The BOE cancelled its stress test for 2020, hoping that both banks and regulators would strictly focus on the financial crisis resulting from COVID-19. As the COVID-19 pandemic continues, and economic factors rapidly change, it remains to be seen if the 2020 stress tests, even those specifically addressing COVID-19, will provide any concrete insight regarding the current health of banks. A copy of the Fed’s Comprehensive Capital Analysis and Review (CCAR) for 2020 can be found here.
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