OCC and FRB Release New Stress Test Scenarios

The Office of the Comptroller of the Currency ("OCC") and the Board of Governors of the Federal Reserve ("FRB") released three supervisory scenarios for upcoming stress tests of certain financial institutions. These include national banks and federal savings associations with total consolidated assets of more than $10 billion as required by Dodd-Frank Act Section 165(i)(2).

The FRB's stress test hypothetical scenarios are categorized as baseline, adverse, and severely adverse. In brief, they may be described as follows:

• The baseline scenario for the United States assumes a moderate economic expansion through the projection period where real GDP grows at an average rate of 2½ percent per year.

• The adverse scenario features models of a moderate U.S. recession that begins in the first quarter of 2016. Real GDP in the United States falls 1¾ percent from the pre-recession peak in the fourth quarter of 2015 to the recession trough in the first quarter of 2017, while the unemployment rate rises steadily, peaking at 7½ percent in the middle of 2017.

• The severely adverse scenario is characterized by a severe global recession, accompanied by a period of heightened corporate financial stress and negative yields for short-term U.S. Treasury securities.

FRB Governor Daniel Tarullo commented that "In adjusting the scenarios for our yearly stress testing program, [the FRB strives] to assess the resilience of the nation's largest banks in a variety of potential adverse environments. It is important that the tests not be too predictable from year to year." The FRB also indicated that the scenarios are intended to test the economic resilience of banking organizations, not to serve as economic forecasts.