The U.S. Federal Reserve released on Thursday the economic scenarios, including a hypothetical sharp slowdown in China, that the biggest banks will use in the next round of stress tests to determine how they would withstand a financial shock.
Regular stress tests are part of a more rigorous regime required by the 2010 Dodd-Frank financial oversight law. They are designed to that ensure banks have enough capital cushions and are not being overly aggressive in returning cash to shareholders.
In the toughest of the three scenarios, banks would face a severe recession in the United States, with the unemployment rate spiking up to about 12 percent, and recessions in Europe and Japan. The Fed said this is similar to last year's test.
In addition, a sharp weakening of economic activity in China would spill over into the rest of developing Asia under the severely adverse scenario this year, the Fed said.
Analysts said the test scenarios should come as no surprise to banks.
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