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The Federal Reserve announced that it would require the nation’s 31 largest banks with assets of $50 billion or more to stress test their portfolios annually against severe economic contraction scenarios in both the U.S. and Europe.The banks will have to post 2012 capital plans by mid January, along with projected revenues and losses on four different possible events.
Of the scenarios run, two have been created by the Federal Reserve, while each bank will be allowed to create another two scenarios.
In the Fed’s first and more extreme scenario, the U.S. falls into extreme recession during the fourth quarter of 2011, contracting some 8%. Unemployment would spike to 13.05%, before growth returns in 2013. Under the second scenario, GDP growth remains anemic through 2014, never topping 3%.
“Institutions will be expected to have credible plans that show they have sufficient capital so that they can continue to lend to households and businesses, even under adverse conditions, and are well prepared to meet regulatory capital standards agreed to by the Basel Committee on Banking Supervision as they are implemented in the United States,” the Fed said in a statement.
In the past, the Federal Reserve waited to publish results until banks had completed the tests. However, in a change of pace, the authority has placed the requirements and scenarios on its website for public disclosure.
Nineteen banks that were required to conduct stress tests in 2011 will be joined by an additional 12 this year. Six of the banks with the largest trading operations will have to complete a scenario where a global shock cripples markets, including “sharp” price movements of European sovereigns.
The banks mandated to compile the data include J.P. Morgan Chase, Citigroup, Bank of America, Wells Fargo, Goldman Sachs, Morgan Stanley, MetLife, PNC Financial Services Group, US Bancorp, Bank of NY Mellon, SunTrust, State Street, Capital One Financial, BB&T Corp., Regions Financial Corp., American Express Co., Fifth Third Bancorp, Keycorp, GMAC LLC, BBVA USA Bancshares, BMO Financial, Citizens Financial, Comerica, Discover Financial Services, HSBC North America, Huntington Bancshares, M&T Bank Corp., Northern Trust Corp., RBC USA Holdco Corp., UnionBanCal, and Zions Bancorporation.
The six banks that must also complete the trading scenario are Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, and Wells Fargo.
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