Federal Reserve Finalizes Severe Scenarios for 2026 Stress Test

Fed Outlines Challenging Economic Landscape for Banks

The Federal Reserve has officially finalized the hypothetical scenarios for its 2026 annual stress test, setting a rigorous benchmark for 32 large banks operating in the United States. The scenarios, designed to assess the resilience of these financial institutions, depict a severe global recession marked by a substantial increase in unemployment and sharp declines in asset values. The final scenarios, largely consistent with proposals made in October, are set to become effective on February 15, 2026.

Key Elements of the Severely Adverse Scenario

The core of the 2026 stress test is a 'severely adverse scenario' that models a deep economic downturn. Key components of this hypothetical recession include:

• A nearly 5.5-percentage-point rise in the U.S. unemployment rate, peaking at 10 percent.
• Significant declines in asset prices, with house prices falling by approximately 30 percent and commercial real estate prices dropping by 39 percent.
• Severe market volatility, accompanied by a widening of corporate bond spreads to 5.7 percentage points.
• Equity prices experiencing a substantial fall of about 58 percent within the first three quarters of the scenario.
• The U.S. Market Volatility Index (VIX) spiking to a peak of 72 percent.

The Federal Reserve explicitly stated that these scenarios are not economic forecasts or predictions of future conditions, but rather tools to ensure banks are prepared for extreme events.

Purpose and Scope of the Stress Tests

The primary objective of these annual stress tests, mandated by the Dodd-Frank Act, is to ensure that large banks maintain sufficient capital to continue lending to households and businesses even during a severe economic downturn. The tests evaluate the financial resilience of banks by estimating potential losses, revenues, expenses, and resulting capital levels under these hypothetical conditions over a two-year horizon.

For banks with substantial trading operations, the stress test includes additional components, such as a global market shock and a counterparty default scenario, which assess potential losses from the unexpected default of a firm's largest counterparty amidst an acute market shock.

Stress Capital Buffer Maintained Until 2027

In a related decision, the Federal Reserve Board voted to maintain the current stress capital buffer requirements until 2027. This extension allows the Fed to incorporate public feedback and further refine its supervisory models before calculating new requirements. Vice Chair for Supervision Michelle W. Bowman commented on this, stating that 'Waiting to calculate new stress capital buffer requirements until we receive public feedback will give us the opportunity to correct any deficiencies in our supervisory models.'