The Federal Reserve released the three economic and financial market scenarios that it will use in the next round of capital planning and stress testing for banking institutions with more than $10 billion in assets. 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 2.5% a year, unemployment falling to 4.5% by the middle of 2017, steadily rising short-term Treasury rates and steadily growing housing prices.
Meanwhile, under the severely adverse scenario, the world would plunge into a severe recession. That would include real U.S. GDP declining 6.25% by the first quarter of 2017, equity prices falling 50% through 2016, unemployment peaking at 10% by mid-2017 and housing prices plummeting 25% during the scenario period.
Bank holding companies 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. CCAR involves the nation’s 33 largest financial institutions, two of which will be participating for the first time. Of the 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 April 5, and stress test results will be announced by the Fed before June 30.
The OCC today issued instructions and scenarios for stress tests conducted by the banks it supervises with more than $10 billion in assets, and the FDIC is expected to do the same shortly.