The Federal Reserve said that it would examine how exposed the largest U.S. banks are to “risky corporate borrowers” in its next round of stress tests, reflecting regulators’ growing concern about lending to companies with high debt levels, the Wall Street Journal reported today. The Fed released details yesterday of the hypothetical market and economic conditions the banks must be able to withstand as part of the annual tests, which examine a bank’s ability to keep lending during a downturn. As in previous years, the 2015 tests will include a sharp increase in unemployment—to 10 percent in 2016—and a significant retraction in economic growth. But the next round of the Fed’s “severely adverse” scenarios includes a worse deterioration in the financial condition of large corporations, reflected by rising corporate-bond yields, especially for companies with high debt levels. Banks must show that they can withstand losses from loans extended to those companies. The Fed’s inclusion of stresses on banks’ portfolios of leveraged loans echoes regulators’ broader concerns about excessive risk-taking in that sector of the credit markets. In addition to the deterioration in corporate credit, the 2015 “severely adverse” stress-test scenario assumes a jump in oil prices to about $110 a barrel.
