US banks to face severe recession scenario in Fed stress tests

Wall Street banks will have to prove they can survive a severe global recession as part of an annual test bythe Federal Reserve.

Details of the Fed's plans for 2017's Dodd-FrankAct stress test exercises were revealed on Friday.

The testsare a forward-looking assessment to help assess whether firms have sufficientcapital to absorb losses.

Scenarios of the US unemployment rate rising by about 5.25percentage points to 10% will be part the checks this year, as well as heightened stressin corporate loan markets and commercial real estate markets.

Thirteen of the largest and most complex bank holdingcompanies, including JP Morgan, Goldman Sachs, will be subject to both aquantitative evaluation of their capital adequacy and a qualitative evaluationof their capital planning capabilities.

The central bank announced earlier this week that twenty one firmswith less complex operations will no longer be subject to the qualitativeportion of what's known as the Comprehensive Capital Analysis and Review (CCAR).

Six bank holding companies with large trading operations –Morgan Stanley, Goldman, Citi, Bank of America, JP Morgan and Wells Fargo - willalso be required to factor in a global market shock as part of their scenarios.

Eight bank holding companies, State Street, BNY Mellon and the six listed above, will be required to incorporate a counterparty default scenario.

Banks are required to submit their capital plans and stresstest results to the Fed by April 5.

The Fed will announce the results before the end of June.