The Fed Releases Their Stress Test Scenario

“The Fed just announced that the latest round of bank stress tests will come out Thursday at 4:30 PM ET.

As a reminder, this is the doom scenario banks will be stress tested again:

The supervisory stress scenario for CCAR 2012, which was designed in November 2011, depicts a severe recession in the United States, including a peak unemployment rate of 13 percent, a 50 percent drop in equity prices, and a 21 percent decline in housing prices. The supervisory stress scenario is not the Federal Reserve’s forecast for the economy, but was designed to represent an outcome that, while unlikely, may occur if the U.S economy were to experience a deep recession at the same time that economic activity in other major economies contracted significantly.

More from the Fed announcement:

The Federal Reserve evaluates institutions’ capital plans across a range of criteria, including a stress test that examines whether a firm could make all the capital distributions included in its plan–such as dividends and stock repurchases–while still maintaining capital above the Federal Reserve’s standards in a hypothetical supervisory stress scenario. Other considerations for capital distributions include an evaluation of the firms’ capital planning processes and plans to meet international capital agreements as new requirements are phased in beginning in 2013. The stress-test results, including projected capital ratios, revenues, and losses in the supervisory stress scenario, will be disclosed for the 19 large bank holding companies that participated.

To illustrate the impact of the stress scenario alone, the Federal Reserve also calculated stressed capital ratios including planned capital actions through March 31, 2012, but excluding proposed actions for the remainder of the stress scenario horizon and assuming no material capital issuances from March 16 through March 31, 2012. Those results will also be disclosed….”

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