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There is enormous uncertainty about the path of the economy and the resulting losses in the banking sector because there remains enormous uncertainty about the spread of COVID-19. As banks face potentially greater losses and declines in their capital cushion, there is concern they may not be able or willing to support lending in the economy, which could amplify the economic downturn.
The Minneapolis Fed has long been a proponent of ensuring that large banks are resilient in order to protect taxpayers. Given the much-higher-than-normal uncertainty about the economic outlook, we launched a new tool that the public can use to assess the financial resilience of the largest banks in the United States.
The COVID-19 stress test tool gives people another set of data and tools to help judge the health of the nation’s largest banks. Users can make various assumptions about economic variables, such as unemployment, gross domestic product, and the stock market, to see how the choices translate into the capital levels of the nation’s largest banks. The tool uses the Minneapolis version of the publicly available stress test model developed by the Federal Reserve Bank of New York (the “CLASS” model) along with publicly available data on the banking system.
In the coming months, the Minneapolis Fed will convene experts to evaluate publicly available bank assessment tools, like this one, and learn how they can be improved for the benefit of researchers, academics, and interested members of the public.
The 2008 crisis taught us that a weak banking sector can magnify an economic downturn. It is in everyone’s interest to make sure the banking sector is resilient against downside scenarios from COVID-19. Having more analysis can show where we might be heading under current policy and if we should change course.
