Tuesday, November 22, 2011

Fed outlines new bank supervisory stress test

by Bill McBride on 11/22/2011 04:40:00 PM

From the WSJ: Fed Outlines Plans for New Bank Stress Tests

The Federal Reserve on Tuesday outlined plans for annual tests of the financial strength of the largest U.S. banks and said some of the results would be made public.

Banks must submit their plans to the Fed by Jan. 9 for the "stress tests," which apply to 19 firms that participated in similar tests earlier this year and 12 more with at least $50 billion in assets that have not participated in similar tests before ... When the stress tests are complete, the Fed said it will publicly disclose its estimates of bank revenue and losses and estimates of bank capital ratios for the 19 largest firms.
Here is the press release from the Federal Reserve.

The stress test scenario is outlined here. The stress tests assume the unemployment rate will rise to 13% in 2013, that the Dow Jones (update: Dow Jones Total Stock Market Index) will decline by more than 50% from the current level. The scenario assumes that house prices will fall another 20%+.

Stress Tests Click on graph for larger image.

This graphs shows the stress test scenarios for the Dow Jones and a house price index.

This scenario shows the Dow Jones Total Stock Market Index falling to 5,668 in Q4 2012 (from 11,771.86 at the end of Q3), and house prices declining until early 2014 - and off almost 47% from the peak in 2006.