Toronto-based Bank of Montreal (BMO) will get a pass on the qualitative portion of U.S. bank stress tests this year, but Toronto-Dominion Bank (TD) will still undergo the full test geared to the biggest banks in the U.S. under plans the U.S. Federal Reserve Board set out on Friday.
The Fed published the scenarios to be used by banks and regulators in this year’s upcoming stress tests and the accompanying Comprehensive Capital Analysis and Review.
The Fed has determined that 21 firms that are large, but less complex, will not have to go through both a qualitative and quantitative evaluation of their capital positions this year. Instead, only the 13 largest, most complex banks will be subject to both aspects of the stress testing process.
In terms of the Canadian banks that operate in the U.S., BMO will now not face the qualitative evaluation of its capital planning; however, TD will still be subject to that portion of the process.
As for the stress tests themselves, the Fed set out the various scenarios that will be used this year. Under the severely adverse scenario, banks will be tested on the assumption of a severe global recession that would push the U.S. unemployment rate up to 10%, along with heightened stress in corporate loan markets and commercial real estate markets. The adverse scenario features a moderate recession in the U.S.
The six banks with large trading operations will also have to factor in a global market shock as part of their testing; eight firms with substantial trading or processing operations will be required to incorporate a counterparty default scenario. This only applies to the largest Wall Street firms, such as Citigroup Inc., Bank of America Corp., J.P. Morgan Chase & Co. and Goldman Sachs Group Inc.
Banks are required to submit their capital plans and stress testing results to the Fed by April 5. The Fed will announce the results of its supervisory stress tests by June 30.