Virus slowdown starts to rival Fed's scenario

The unfolding market shock and economic crisis wrought by the coronavirus disruption is shaping up to be a nightmare for the Federal Reserve - literally.

Over the past month, rapidly deteriorating economic and financial conditions have begun to rival the central bank's doomsday scenario against which it will test big banks' resilience during their annual "stress test" exams next month.

Of the 16 dire domestic indicators the Fed dreamt up for this year's test, including plunging stock markets, record low Treasury yields, slumping economic growth and mass unemployment, five have been breached while others are skirting close.

The meltdown, which at one point wiped roughly $6 trillion off U.S. stock markets and clogged up shortterm funding markets, is so bad that some bankers have privately grumbled that the Fed should follow its peers in Europe and the United Kingdom and scrap the tests altogether this year.

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.

"They need to understand where the banks are heading into this," said Tim

Clark, a former senior Fed official who helped build the stress tests after the last crisis. "The Fed needs to understand where the major pockets of vulnerability are in the system," said Clark.

Since the 2008 financial crisis, the Fed has put large banks through their paces each year by testing a snapshot of their balance sheets against a hypothetical market shock.

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.