WASHINGTON, Feb. 12 (Xinhua) -- The U.S. Federal Reserve on Friday released the hypothetical scenarios for its stress tests this year that will apply to the country's largest 19 banks.
"The hypothetical recession begins in the first quarter of 2021 and features a severe global downturn with substantial stress in commercial real estate and corporate debt markets," the Fed said in a statement.
In the "severely adverse" scenario, U.S. gross domestic product (GDP) falls 4 percent from the fourth quarter of 2020 through the third quarter of 2022, with equity prices tumbling by 55 percent, while U.S. unemployment rate rises by 4 percentage points from its starting point, reaching a peak of 10.75 percent in the third quarter of 2022, according to the Fed.
"The scenarios are not forecasts and the severely adverse scenario is significantly more severe than most current baseline projections for the path of the U.S. economy under the stress testing period. They are designed to assess the strength of large banks during hypothetical recessions," the Fed said.
Since 2009, the Fed has used the annual stress tests to measure large U.S. banks' ability to respond to severe economic and market turbulence. If a bank's capital is found to be inadequate, the central bank can block it from buying bank shares or paying dividends.
After last year's stress tests, the Fed said U.S. large banks had strong capital levels under hypothetical scenarios with severe global recessions, while placing restrictions on bank payouts to preserve the strength of the banking sector.
"The banking sector has provided critical support to the economic recovery over the past year. Although uncertainty remains, this stress test will give the public additional information on its resilience," Fed Vice Chair for Supervision Randal Quarles said in a statement.