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Tuesday, June 09, 2009

TARP Panel Chair Suggests Running Stress Tests Again

by Calculated Risk on 6/09/2009 08:39:00 AM

From CNBC: Repeat Bank Stress Tests 'Right Now': TARP Panel Chair

The Congressionally-appointed panel overseeing the Troubled Asset Relief Program (TARP) recommends running again the stress tests on US banks, as economic conditions have worsened, its chair, Harvard University professor Elizabeth Warren, told CNBC Tuesday.

"We actually make recommendations to do it all over again right now," Warren told "Squawk Box."

"We've already blown past the worst-case scenario on unemployment," she added.
Other reasons for concern are that the model used in the Treasury's stress tests stretches on less than two years, while many commercial mortgages are coming up in 2011, 2012 and 2013, Warren said.
Stress Test Unemployment Rate Click on graph for larger image in new window.

This graph shows the unemployment rate compared to the stress test economic scenarios on a quarterly basis as provided by the regulators to the banks (no link).

This is a quarterly forecast: in Q1 the unemployment rate was higher than the "more adverse" scenario. The Unemployment Rate in Q2 (only two months) is already higher than the "more adverse" scenario, and will probably rise further in June.

Note also that the unemployment rate has already exceeded the peak of the "baseline scenario".

The second graph compares the Case-Shiller Composite 10 NSA index with the Stress Test scenarios from the Treasury (stress test data is estimated from quarterly forecasts).

Case-Shiller Stress Test Comparison The Stress Test scenarios use the Composite 10 index and start in December. Here are the numbers:

Case-Shiller Composite 10 Index, March: 151.41

Stress Test Baseline Scenario, March: 154.82

Stress Test More Adverse Scenario, March: 149.96

It has only been three months, but prices are tracking close to the 'More Adverse' scenario so far.

For GDP, the baseline case was for GDP to decline at a 5.0% annual real rate in Q1, and the more adverse scenario was for a decline of 6.9%. The BEA preliminary report showed a decline of 5.7% in Q1 (about half way between the two scenarios).

So far GDP and house prices are tracking a little better than the more adverse scenario, and unemployment worse.

Meanwhile CNBC says American Express and Morgan Stanley are on the list to repay TARP funds. CNBC also lists Goldman Sachs Group, JPMorgan Chase, State Street, U.S. Bancorp and BB&T.

The WSJ lists American Express Co., Bank of New York Mellon Corp., Capital One Financial Corp., Goldman Sachs Group Inc. and J.P. Morgan Chase & Co.