RSS Feed by Calculated Risk on 10/23/2014 06:00:00 PM
Thursday, October 23, 2014
FDIC Releases Economic Scenarios for 2015 Stress Testing
From the FDIC: FDIC Releases Economic Scenarios for 2015 Stress Testing
The Federal Deposit Insurance Corporation (FDIC) today released the economic scenarios that will be used by certain financial institutions with total consolidated assets of more than $10 billion for stress tests required under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.Here is an excel spreadsheet with the scenarios.
The baseline, adverse, and severely adverse scenarios include key variables that reflect economic activity, including unemployment, exchange rates, prices, income, interest rates, and other salient aspects of the economy and financial markets.
The baseline scenario represents expectations of private sector economic forecasters. The adverse and severely adverse scenarios are not forecasts, rather, they are hypothetical scenarios designed to assess the strength and resilience of financial institutions and their ability to continue to meet the credit needs of households and businesses under stressed economic conditions.
Note: I'm not even on "recession watch", and I think the baseline is the most likely scenario for the next couple of years. However I think these regular stress tests are very helpful for regulators.
The first table is a summary of the baseline scenario (basically in line with most economic forecasts for GDP and unemployment).
| Stress Test Baseline Scenario | ||||
|---|---|---|---|---|
| GDP1 | Unemployment2 | DOW3 | House Prices3 | |
| 2014 | 2.2% | 5.9% | 6.5% | 4.1% |
| 2015 | 2.9% | 5.4% | 5.1% | 2.5% |
| 2016 | 2.9% | 5.3% | 5.3% | 3.0% |
| 2017 | 2.7% | 5.3% | 5.3% | 3.0% |
2 Unemployment is for Q4 of each year.
3 The change in the DOW and House Prices is from Q4 of the preceding year to Q4.
The second table is the adverse scenario. This is moderate recession, but a slow recovery. Under the adverse scenario, unemployment peaks at 8% in 2017. The DOW declines about 28% from peak to trough, and house prices fall 13%.
| Stress Test Adverse Scenario | ||||
|---|---|---|---|---|
| GDP1 | Unemployment2 | DOW3 | House Prices3 | |
| 2014 | 1.3% | 6.4% | 0.0% | 2.6% |
| 2015 | -0.3% | 7.6% | -16.3% | -7.7% |
| 2016 | 1.4% | 8.0% | -7.8% | -5.6% |
| 2017 | 2.0% | 8.0% | 0.1% | 0.9% |
The third table is the severely adverse scenario. This is a severe recession, but a fairly quick recovery. Under the severely adverse scenario, unemployment peaks at 10.1% in 2016. The DOW declines about 58% and house prices fall 25%.
| Stress Test Severely Adverse Scenario | ||||
|---|---|---|---|---|
| GDP1 | Unemployment2 | DOW3 | House Prices3 | |
| 2014 | 0.4% | 6.9% | -11.7% | 1.9% |
| 2015 | -3.7% | 9.9% | -49.8% | -14.9% |
| 2016 | 2.1% | 9.9% | 33.9% | -11.0% |
| 2017 | 3.9% | 9.1% | 43.1% | 2.0% |
