Next Round of Federal Reserve Stress Tests to Look at Corporate Clients
Yesterday, on October 23, 2014, the Federal Reserve announced the latest round of stress tests to be conducted in 2015, under the Comprehensive Capital Analysis and Review (CCAR) program and the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). In addition to other strenuous conditions, the Federal Reserve will test a financial institution’s ability to withstand distress among its corporate borrowers.
In its release, the Federal Reserve cited concerns with corporate lending, saying the “sector experiences increases in financial distress that are even larger than would be expected in a severe recession.” A total of 31 institutions, with $50 billion or more in assets, will be subject to next year’s testing. To examine problems that could occur with the banking industry’s increasingly risky corporate lending, the Federal Reserve will simulate increasing spreads on assets linked to corporate loans such a leveraged loans.
The Federal Reserve will also test for spikes in unemployment and oil prices. While the stress tests are largely an internal exercise for covered entities, the inclusion of the new corporate lending measures suggest that the Federal Reserve and other regulators may plan to devote more attention to risky corporate debt next year.