Banks in the US will have to test whether they can survive a halving of the stock market during a severe US recession, the Federal Reserve said yesterday, as it set the rules for next year's model runs to gauge the health of the financial system.

Eight large US banks must also test for the first time whether they can cope with the hypothetical default of their largest trading partner, the Fed said in documents laying out the so-called "stress tests".

"The capital planning and stress testing programme has contributed to a significant increase in capital at the largest banking organisations in the US," the US central bank said.

The stress tests were mandated by the Dodd-Frank law - aimed at preventing a repeat of the 2007-09 credit crisis - and measure how a bank's loan books and security portfolios hold up under a range of adverse economic scenarios.