US Fed Updates Worst Case Scenario for Stress Tests

October 24, 2014 Share Print 2

The U.S. Federal Reserve said on Thursday it would assume wider corporate bond spreads and a higher oil price in the most strenuous scenario it will use in next year’s run of its annual check of banks’ health.

Overall, however, the Fed said its “severely adverse” scenario was largely similar to the one it had used in its 2014 run of the so-called stress tests, mandatory for any bank with assets of more than $50 billion.

The tests were introduced after the 2007-09 financial crisis, and are an increasingly important part of the Fed’s toolkit to make sure the largest banks stay safe, and to avoid a repeat of costly taxpayer bailouts.

The Fed can bar a bank from raising shareholder payouts such as dividends or share buybacks if it fails to show it can survive the three increasingly dire hypothetical economic scenarios used in the stress tests.

via Reuters

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Alfonso Esparza

Senior Currency Analyst at Market Pulse

Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.