The Federal Reserve Board ("FRB") issued scenarios for the 2019 Comprehensive Capital Analysis and Review and Dodd-Frank Act stress tests. Each scenario includes 28 variables (e.g., gross domestic product, the unemployment rate, stock market prices and interest rates) that cover domestic and international economic activity.
The stress tests apply three hypothetical scenarios:
- a "baseline scenario," which is a "moderate economic expansion through the scenario period," with the unemployment rate increasing to up to 4 percent by the first half of 2021;
- an "adverse scenario," which is characterized by "weakening economic activity across all of the economies included in the scenario, accompanied by a moderate correction in asset prices and rise in volatility"; and
- a "severely adverse scenario," which contemplates a "severe global recession accompanied by a period of heightened stress in commercial real estate markets and corporate debt markets."
According to the FRB, firms with large trading operations will need to take into consideration a global market shock component as a part of their scenarios. Further, firms with significant trading or processing operations must include a counterparty default scenario component.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.