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Fed announces 2021 stress tests, eyeing trouble in commercial real estate and corporate debt

Today, Federal Reserve unveiled hypothetical recession scenarios it plans to test large banks against for 2021 stress test. This test includes a “substantial stress” in the commercial real estate and corporate debt markets. This focus deserves close attention from all major CRE lenders.

Deloitte has separately published its 2021 outlook for CRE market by soliciting feedback from 200 industry leaders. The report mentions a 36% decline YoY in deal volume across the globe but it also delves into preparedness of these CRE companies to adjust to change, from funding to processing and routine operations.

In order to test large banks’ ability to absorb this shock the Fed is considering a global recession through a 10.75% unemployment rate, drop in economic growth by 4%, and a severe stock market decline of 55%. Nineteen of the largest US banks will be subject to this test. Results will be published this summer.

U.S. banks were tested twice in 2020 in light of the impact of coronavirus pandemic exceeding initial expectations and well beyond Fed’s original test. Good news is that after both tests, the largest banks were found to be well-capitalized. Bad news is that the results allowed Fed to relax restrictions on capital payouts like stock buybacks.

Across the pond, Financial Policy Committee (FPC) judged that in 2020 UK banks, in aggregate, had capital buffers to remain resilient to a wide range of possible economic outcomes in UK. FPC is requiring UK banks to perform their own 2021 stress tests using a more severe scenario than that of 2020.

Included in this year’s test will be 12 firms with significant trading operations. Stress test will reveal resiliency of their operations against a 55% drop in market value.

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