• Mon. Nov 28th, 2022

Fed to Stress Test Banks Against Commercial Real Estate, Corporate Debt Troubles in 2022

ByWillie M. Evans

Feb 10, 2022

The Federal Reserve Building is seen in Washington, U.S., January 26, 2022. REUTERS/Joshua Roberts

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WASHINGTON, Feb 10 (Reuters) – The U.S. Federal Reserve said on Thursday its round of major bank stress tests for 2022 will include a sharp drop in commercial real estate prices and turmoil in corporate bond markets.

The hypothetical recession that the Fed will use as the basis for its tests also predicts unemployment to rise to 10% over two years. Commercial real estate prices will fall 40% during this period, while corporate debt and other assets will plummet in value. The test will be applied to 34 of the largest banks in the country.

The 2022 test closely follows the testbeds taken in 2021, with some minor changes. The unemployment rate climbs to 10% from 10.75% in 2021 – however, the unemployment rate in 2022 is much lower than it was when the 2021 scenarios were released.

The 2022 test also includes a sharp decline in the US economy, followed by a rapid recovery. The test predicts the country’s gross domestic product (GDP) to fall more than 3.5% over just over a year – a steeper but shorter drop than the 2021 test.

As it has done in previous years, the Fed said banks with large trading operations would be tested against a global market shock, while banks with large trading and custody operations would be tested. against the hypothetical default of their largest counterparty.

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Reporting by Pete Schroeder; Editing by Leslie Adler and Diane Craft

Our standards: The Thomson Reuters Trust Principles.