The Federal Reserve released the three economic and financial market scenarios that it will use in the next round of stress tests for the nation’s 31 largest financial institutions, one of which will be participating for the first time. The three scenarios -- baseline, adverse and severely adverse -- include 28 variables such as unemployment, exchange rates, prices and interest rates.
Under the baseline scenario, the economy would experience moderate expansion. That would include, among other things, real gross domestic product increasing a little under 3 percent a year, unemployment falling to 5.25 percent by the end of 2017, normalization of Treasury yields and steadily growing housing prices.
Under the severely adverse scenario, the country would plunge into a severe recession. That would include real GDP declining 4.5 percent and equity prices falling 60 percent by the end of 2015, unemployment peaking at 10 percent in 2016 and housing prices plummeting 25 percent during the scenario period.
Banks with $50 billion or more in assets are subject to the stress tests as part of the Fed’s Comprehensive Capital Analysis and Review program. Of the 31 participating banks, six with large trading operations will participate in an additional test of reactions to a global market shock, and eight banks will be required to incorporate a counterparty default scenario. Capital plans are due to the Fed by Jan. 5, 2015.
The FDIC and OCC also released stress-test scenarios today applicable to banks with more than $10 billion in assets.
Read the Fed’s announcement.
Read the Fed’s scenarios.
Read the FDIC’s guidance.
Read the OCC’s guidance.