2020 Stress Tests To Emphasize Leveraged Lending Risks

On Feb. 6, the Federal Reserve Board released the hypothetical scenarios for the 2020 stress test exercises, which ensure that large banks have adequate capital and processes to continue lending to households and businesses even during a severe recession. The harshest scenario includes a severe global recession with heightened stresses in corporate debt markets and commercial real estate, and for banks with large trading operations, additional pressure on leveraged loans. 

The Board’s stress test framework consists of the Comprehensive Capital Analysis and Review, also known as CCAR, and the Dodd-Frank Act stress tests. Both exercises have been a cornerstone of the Board’s post-crisis framework for large banks, and this year’s stress tests will evaluate 34 large banks with more than $100 billion in total assets. The stress tests include two hypothetical scenarios: baseline and severely adverse. The severely adverse scenario this year features a severe