The potential of large bank failure puts the American taxpayer at risk. Preventing such failure and subsequent bailouts requires understanding the ability of these banks to withstand a large shock, such as a recession. With that understanding will come the motivation to enact government policies that will protect taxpayers. One of the best tools to assess the condition of banks is a stress test. Providing regular, transparent assessments of the health of the largest banks—and whether they will have sufficient capital to support lending during a future economic shock—will help empower the public to make their own assessments of the strength of large banks.
We created the tool below to allow the public to run their own stress tests on the largest banks in America. You can vary the amount of stress that large banks face in this test and see how their financial health (for example, capital buffer) changes. In short, the public will now have the transparency they need to judge the condition of the largest banks.
Results produced from the tool are derived from the model we created that was based heavily on Hirtle, Kovner, Vickery, and Bhanot (2014). You can find output from that original model on the New York Fed web page. A description of the key changes in the Minneapolis version can be found here. We continue to evolve the stress testing tool to increase its power and functionality for the public. You can learn more about potential uses of this tool based on the conference we sponsored on the topic, “Empowering the Public to Assess Large Bank Resiliency, “ by viewing this video and consulting this article. Feedback and suggestions for additional enhancements to the underlying model are welcome.
|Moderate recession||Severe recession||Extreme recession|
|Real GDP growth|
|3m T-bill yield|
|10yr T-note yield|
|BBB bond yield|
|CRE price index|
|House price index|
Read Frequently Asked Questions about the Minneapolis stress test model
This zip file includes the computer code and data files used in the Minneapolis stress test model.
- The chart above is an extension of the article on stress testing for large banks in the COVID-19 pandemic published on May 12, 2020. This web page allows users to select different paths for the eight macroeconomic variables used in the Minneapolis version of the CLASS model and then see the resulting projection of capital for the 21 domestic banks that are part of (or can opt into) the 2021 DFAST exercise.
- The scenarios shown here are not forecasts but are instead hypothetical scenarios. The scenarios were constructed to help illustrate how large banks could react to the adverse economic conditions associated with severe recessions.
- The capital projections in the stress scenarios include the performance of banks under the negative economic conditions along with additional losses resulting from operational risk, counterparty default, and the global market shock to large bank trading portfolios (based on the recently released official results from the final 2020 exercise).
- A new option has been added that allows users to specify the amount of earnings that will be paid out in the form of dividends and stock buybacks (the “payout policy”). Projected capital will be lower when higher amounts of earnings are paid out in dividends and buybacks.
- The dashed red line in the chart labeled “capital threshold” is one of the following:
- 4.5 percent if an individual bank is chosen that is not one of the eight systemically important firms;
- 4.5 percent plus the applicable GSIB surcharge if the firm is one of the 8 systemically important firms (the surcharge is 2.5 percent for JP Morgan Chase, 2.0 percent for Citigroup, 1.5 percent for Bank of America, Goldman Sachs, and Wells Fargo, and 1.0 percent for Bank of New York Mellon, Morgan Stanley, and State Street);
- 5.8 percent if the “21-firm total” is selected, which is the aggregate amount of capital required by the set of firms to meet the 4.5 percent statutory minimum of risk-weighed assets plus the applicable GSIB surcharges for the eight systemically important firms (this amount was roughly $530 billion as of the fourth quarter of 2020).