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Explainer-What’s new with the Fed’s bank stress tests in 2022 -Breaking


© Reuters. FILE PHOTO – The Federal Reserve Board Building on Constitution Avenue in Washington, U.S.A, 19 March 2019 REUTERS/Leah Millis/File photo

By Pete Schroeder

WASHINGTON, (Reuters) – The U.S. Federal Reserve is set to release its results from the annual bank health check on Thursday. The Fed’s annual “stress test”, which was established in the wake of the financial crisis 2007-2009, tests the banks’ balance sheets for a possible severe economic downturn. These elements change each year.

Based on the results, banks will need to have sufficient capital to stay healthy. They also can return shareholders through share buybacks or dividends.

A bank’s ability to perform well will determine the amount of its “stress Capital buffer” — an additional capital that the Fed must have to weather any downturn. It is a cushion in excess of the regulatory minimums needed to maintain daily business. The buffer will be larger if there are more losses than the bank can absorb.

These are some highlights from this year’s test:


After market close, the Fed will release results on Thursday. It does not reveal the scores of lenders passing or failing. Instead it publishes bank capital ratios and total losses. This includes details about how specific portfolios (e.g. credit cards, mortgages) fared.

Banks cannot announce plans for buybacks and dividends before Monday June 27th.

The country’s largest lenders, particularly JPMorgan Chase & Co (NYSE:), Citigroup Inc (NYSE:), Wells Fargo (NYSE:) & Co, Bank of America Corp (NYSE:)., Goldman Sachs Group Inc (NYSE: Morgan Stanley The markets closely watch (NYSE:) these companies.

Tougher test?

Every year the Fed updates these scenarios. These scenarios take many months to create, so they could become outdated. For example, in 2020 the true economic crash that was caused by the COVID-19 pandemic, which occurred by many measures, was more serious than what the Fed had for the year.

This year’s scenario was created by the Fed before Russia invaded Ukraine. It is now known as hyper-inflationary outlook.

The actual economic base is stronger, which means that the 2022 test will likely be harder than the last one. It means the tests are harder to detect spikes and decreases in economic size.

In 2021, for example, the stress test projected a 4-point jump in unemployment in a “severely unfavorable” situation. The increase of 5.75 percentage points in 2022 is due to an increase in employment over the previous year.

Analysts expect that banks will have to save slightly more capital in order to cover expected losses growth.


The tests this year will include “heightened stress” in commercial realty, which was affected by the pandemic and workers being sent home. The International Monetary Fund and other global watchdogs have raised concerns about high levels of corporate debt that could be deemed risky as interest rates increase globally.


All 34 U.S. banks with assets exceeding $100 billion that are monitored by Fed will be subject to the stress test in 2022. This is a significant improvement on 23 lenders who were tested last year.

This is because in 2020 the Fed established a new test that requires banks of less than $250B in assets to pass the exam every other year. After a year, large regional banks such as Fifth Third Bancorp (NASDAQ) and Ally Financial Inc (NYSE:) Inc have risen again.