Stress Test Assumptions Nutshelled

All bank holding companies with assets over $100 billion will be stress tested. The test will use a baseline scenario and a worst case- longer recession one. Here is where the Fed shows its disconnect with reality yet again, as the worst case scenario is already the optimistic one for several parts of the country. Bank testing under the worst case assumes:

• 3.3% drop in 2009 GDP and +0.5% in 2010;
• Jobless rate of 8.9% in 2009 and 10.3% in 2010 (CA, NV, MI, DC, RI and SC are already at higher unemployment rates)
• 22% drop in 2009 house prices and 7% drop in 2010 (housing inventory at record highs)

The test also will cover off-balance sheet commitments and contingent liabilities. Any firm needing additional capital will issue convertible securities to the US government at the terms disclosed in an earlier post. The testing will be finished by end of April.

Specific cutoff thresholds and criteria for passing or failing (TCE/Tier 1/etc. ratios) not yet disclosed. For our assumptions on what potential tests may look like click here. Sphere: Related Content

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