Feb 26 2009
Is the Worst Case Bad Enough?
Today bank regulators released details of the stress tests the 19 largest banks will be subject to in the coming weeks. The goal is to determine the value of the assets on the balance sheets and to see whether banks have enough capital to withstand the economic downturn as it is forecasted now and also under a more adverse scenario which reflects a deeper and longer recession than in the baseline. Those in need may receive new government money.
For GDP, the “more adverse” scenario, calls for a 3.3% GDP decline in 2009 followed by a 0.5% gain next year. The adverse scenario for home prices incorporates a 22% decline this year and 7% drop next year. The adverse scenario for unemployment is 8.9% this year and 10.3% in 2010.
As a risk manager for a major international bank, I have strong doubts about whether this can be completed by the end of April as projected, and I doubt that the adverse scenarios proposed are severe enough.
First, although as Rich says, the “more adverse” case numbers are pretty staggering, I think it can and will get that bad. We’re in for a long and deep depression on a par with the one our parents told us about.
Second, to answer phuck politicks, a bank is stressed when economic factors, such as unemployment, GDP and interest move adversely. For example, banks are stressed when unemployment rises because, people are more apt to default on their mortgages and credit card commitments, and less likely to increase their bank deposits.