Third, Dodd-Frank domestically and Basel III rules internationally make banks hold far more safe capital on their books precisely to cushion against a shock like this. Turns out those rules work.
Here’s the question I’m trying to answer:
Do current stress tests contemplate a scenario of the same magnitude as 1/3 of US renters simultaneously missing payments?
The stress tests are designed by the Fed and specify what happens to 28 variables such as unemployment and GDP. The description of the scenarios can be found in [1] page 14. Rent delinquency rate is not one of them, but there are 2 real estate indices, House Price Index and Commercial Real Estate Index. The House Price Index under the Fed's severely adverse scenario is supposed to take an instantaneous hit from 280 to 200 and then to keep sliding down from there for 2 more years and reach a minimum of about 150 (I'm rounding all the numbers a little). What happened is the HPI was flat during the Covid19 crisis [2] page 7. Something similar happened for the Commercial Real Estate Index too: the Fed prescribed shock was very large and the actual index barely moved.