Wall Street banks will have to show they could survive a major global recession as part of an annual Federal Reserve exercise aimed at ensuring the biggest lenders aren't vulnerable to a new financial crisis.
The stress-test scenarios released on Friday by the Fed will be used to determine whether firms such as JPMorgan, Goldman Sachs and Deutsche Bank are strong enough to withstand a major blow to the broader economy. Good performance could give banks more leeway to pay dividends to their shareholders and buy back stock.
The newly-released scenarios feature the jobless rate climbing 5.25 percentage points to 10pc and difficulties in corporate lending. Most midsize and smaller US lenders will get a big break this year after the Fed said earlier this week that it would let them escape from one of the toughest parts of the exams. Banks are required to submit their capital plans and stress test results to the Fed by April 5. The central bank said it will announce the results before the end of June.
The stress tests, which were introduced after the 2008 financial crisis, have driven capital levels higher as banks try to ensure they're not among those buckling under the Fed's nightmare scenarios. On Monday, the central bank said only the 13 biggest lenders will now face the so-called qualitative side of the tests, where many have been tripped up in the past.
The annual reviews required under the Dodd-Frank Act could be under a different sort of stress as President Donald Trump calls for a sweeping review of the 2010 law as part of an attack on what he sees as over-regulation. Though the stress tests weren't specifically named, they were a core part in the post-crisis overhaul required by the law, and industry groups are waiting to see whether those and similar requirements get easier in the future.
Trump is also weighing nominations for key positions including Fed vice chairman for supervision.