WASHINGTON: The unfolding market shock and economic crisis wrought by the coronavirus disruption is shaping up to be a nightmare for the Federal Reserve – literally.
On Tuesday evening, though, the central bank moved to squash that idea, reminding banks that they will still be required to submit their stress test capital plans on April 6 as scheduled. A central plank of the Fed's post-crisis safety and soundness regime, the tests dictate how much capital and liquidity a bank needs to go about its daily business in the eye of a storm. As the country's economic expansion continued over the past decade, the tests have gotten progressively harsher. But for the first time, reality may be worse than fantasy.In this year's tests for example, the stock market would shed more than 25per cent of its value, the U.S.
That's not all. The yield on 10-year Treasury notes, a key safe-haven asset, has fallen twice as hard as the Fed envisioned, hitting a record low of 0.39per cent this month. It now overs around 0.8per cent, slightly above the 0.7per cent Fed's floor. For one thing, 10 years of stress tests have helped push banks to more than double their common equity capital to roughly US$800 billion, Fed data shows, meaning no banks failed the tests last year.
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