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(Adds details on commercial real estate, Trump order)
By Patrick Rucker and Dan Freed
WASHINGTON, Feb 3 (Reuters) - The Federal Reserve is puttinga bigger focus on commercial real estate in its annual "stresstest" of how well the largest U.S. banks would fare in anotherfinancial crisis.
On Friday, the Fed publicly released a broad description ofcriteria for the 2017 test, and gave lenders until April 5 tosubmit their results, which will be released in June.
The scenarios outlined in the test came on the same dayPresident Donald Trump is expected to issue an executive orderto review banking law introduced in the wake of the 2008 crisisthat required the stress test and other tough financialregulations.
The 2017 exam imagines a sudden shock in which the U.S.unemployment rate rapidly soars to 10 percent, with stocksplunging and major global economies facing sharp declines inoutput.
The hypothetical U.S. downturn is more severe than in the2016 scenario, and includes a larger decline in commercial realestate prices, the Fed said.
Low interest rates have already pushed banks towardslong-term investments like multifamily housing and commercialreal estate that can deliver higher yields.
Bank regulators have become increasingly concerned about theindustry's exposure to those loans, and worry that banks haveloosened underwriting standards too much. The Office of theComptroller of the Currency in particular has flagged CRE as arisk.
The most heavily concentrated commercial real estateexposure though lies with community and regional banks that arenot subject to the stress test review.
If banks do not prove that they can weather the hypotheticaldownturn, the Fed may freeze payouts to investors or haltbusiness investment plans until they boost capital reserves.
The Fed performed its first stress test in the aftermath ofthe 2008 financial crisis to ensure that banks had enoughcapital to survive. The published results gave investors moreconfidence in the financial system.
The test was formalized in the 2010 Dodd-Frank reformlegislation, which was intended to prevent a future financialmeltdown, and the taxpayer bailouts that ensued. PresidentDonald Trump and some leading Republicans in Congress have saidthey intend to tear up those rules and perhaps replace them.
Only the largest 13 banks are subject to the full stresstest this year. Another 21 lenders have to answer a narrower setof questions, excluding tests of internal controls and planning,after complaints that the stress test was too costly andburdensome for smaller banks.
The biggest banks subject to the full exam this year areJPMorgan Chase & Co, Bank of America Corp,Citigroup Inc, Wells Fargo & Co, Goldman SachsGroup Inc, Morgan Stanley, U.S. Bancorp,Capital One Financial Corp, PNC Financial Services GroupInc, Bank of New York Mellon, State Street Corp and U.S. divisions of HSBC Holdings PLC andToronto-Dominion Bank. (Reporting By Patrick Rucker in Washington and Dan Freed in NewYork; Writing by Lauren Tara LaCapra; Editing by Chizu Nomiyamaand Clive McKeef)
