The Federal Reserve Board released the hypothetical scenarios for its 2025 annual stress test of 22 large banks, alongside two additional hypothetical elements for an exploratory analysis of banking-system risks that will not affect bank capital requirements. The main stress scenario is a two-year severe global recession with heightened stress in commercial and residential real estate markets and in corporate debt markets, and the Board reiterated that the scenarios are not forecasts. Under the 2025 stress test scenario, the U.S. unemployment rate rises nearly 5.9 percentage points to a peak of 10 percent, alongside severe market volatility, wider corporate bond spreads, and a broad asset-price collapse including about a 33 percent fall in house prices and a 30 percent decline in commercial real estate prices. Banks with substantial trading or custodial operations must incorporate a counterparty default component, and banks with large trading operations are also subject to a global market shock; the applicable components for each firm are set out based on third-quarter 2024 data, with M&T Bank Corporation and RBC US Group Holdings LLC opting into the 2025 stress test. The exploratory analysis elements examine (i) banks’ responses to credit and liquidity shocks in the non-bank financial institution sector during a severe global recession and (ii) a market shock applied only to the largest and most complex banks that assumes the failure of five large hedge funds amid reduced global economic activity and higher inflation. Aggregate results for the exploratory analysis will be published alongside the annual stress test results in June 2025. The Board also pointed to planned near-term steps to reduce volatility in stress test results and improve model transparency in the 2025 stress test, and said it intends to begin a public comment process on comprehensive changes to the stress test during 2025.
Federal Reserve Board 2025-02-05
Federal Reserve Board issues 2025 large-bank stress test scenarios and adds exploratory shocks for non-bank stress and hedge fund failures
The Federal Reserve Board released hypothetical scenarios for its 2025 stress test of 22 large banks, including a severe global recession and significant declines in real estate and asset prices. The test includes exploratory elements assessing banks' responses to credit and liquidity shocks and a market shock scenario for the largest banks. Aggregate results will be published in June 2025, with plans to enhance model transparency and reduce volatility in stress test outcomes.