Fed to stress test banks against commercial real estate, corporate debt troubles in 2022

FILE PHOTO: The Federal Reserve building is seen before the Federal Reserve board is expected to signal plans to raise interest rates in March as it focuses on fighting inflation in Washington, U.S., January 26, 2022. REUTERS/Joshua Roberts

WASHINGTON (Reuters) -The U.S. Federal Reserve announced on Thursday that its 2022 round of large bank stress tests will include a severe decline in commercial real estate prices and turmoil in corporate bond markets.

The hypothetical recession the Fed will use as the basis of its tests also envisions unemployment spiking to 10% over two years. Commercial real estate prices will fall 40% over that time frame, while corporate debt and other assets will collapse in value. The test will be applied to 34 of the nation’s largest banks.

The 2022 test tracks closely to the test banks underwent in 2021, with some minor changes. The unemployment rate spikes to 10% compared to 10.75% in 2021 — however, the jobless rate in 2022 is well below where it stood when the 2021 scenarios were released.

The 2022 test also includes a sharp decline in the U.S. economy, followed by a quick recovery. The test envisions the nation’s gross domestic product (GDP) falls over 3.5% over a little more than a year — a sharper but briefer decline than the 2021 test.

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

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