The Federal Reserve has released the three economic and financial market scenarios that it will use in the next round of the Comprehensive Capital Analysis and Review process for 34 of the nation’s largest financial institutions, including one participating in CCAR for the first time. This year, pursuant to a rule finalized last week, 21 of these firms with less complex operations will only be subject to the quantitative portion of CCAR, relieving them from the qualitative evaluation of their capital planning processes.
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 at about 2.25% a year, unemployment falling to 4.25% by the end of 2018, normalization of Treasury yields and steadily growing housing prices.
Under the severely adverse scenario, the world would plunge into a severe recession. That would include U.S. real GDP declining 6.5% from its pre-recession peak by the second quarter of 2018 and equity prices falling 50% by the end of 2017, unemployment peaking at 10% in 2018 and housing prices plummeting 25% during the scenario period.
Of the 34 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.
The OCC also released stress-test instructions on Friday applicable to banks with more than $10 billion in assets. Using the provided scenarios, banks with $10-50 billion in assets will be required to submit the results of their company-run stress tests to their federal regulator by July 31 and to publish the results between Oct. 15 and 31.
Access the Fed’s instructions.
Access the Fed’s scenarios.
Access the OCC’s instructions and scenarios.