Big banks operating in the US have just come through not one but two stress tests. The first, more formalized, was the regular post-global-financial-crisis affair that is conducted by the Federal Reserve, under its comprehensive capital analysis and review (CCAR) regime, and its associated forward-looking component, the Dodd-Frank stress testing (DFAST).
The second, more chaotic, was Covid.
The real-world test informed the hypothetical one. The Fed inserted an additional round of testing in December 2020. And it tweaked its models to take into account what it calls “the Covid event”, specifically in the areas of auto and credit card, commercial real estate and first-lien mortgages in forbearance.
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