The Federal Reserve sought to bolster confidence in the U.S. banking system as concerns over the European sovereign-debt crisis roil financial markets and pose risks to the economic expansion.
The Fed told the 31 largest U.S. banks Nov. 22 to test their loan portfolios against a deep recession to ensure they have enough capital to withstand losses. Banks with large trading operations will also test against a European market shock. The most severe scenarios outlined by the Fed include an unemployment rate of as much as 13 percent, an 8 percent drop in gross domestic product and a 52 percent plunge in stocks from the third quarter of 2011 to the fourth quarter of 2012.
Karen Shaw Petrou, managing partner at Federal Financial Analytics, a Washington regulatory research firm whose clients include the largest banks, described the test as “daunting.”
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