Mass bankruptcies should feature in Fed stress tests – former officials

Crowding of bankruptcy courts can effectively double loss given default, says Jeremy Stein

US Federal Reserve building

The Federal Reserve’s Covid-19 stress test scenario must include a very slow rebound and a lot of bankruptcies to be credible, says former Fed vice-chair Donald Kohn.

“Stress tests are about tail events and resiliency against the tail,” Kohn said during a Brookings Institute panel discussion. The Fed should be testing banks on whether they are capitalised for the business failures and debt restructuring that would occur during a very slow recovery, he says.

The Fed is currently conducting its

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