Bank Stress Tests

March 14, 2012 by staff 

Bank Stress Tests, There are plenty of headlines indicating that several bank holding companies failed the Federal Reserve’s annual bank stress tests, but it’s not quite that simple.

The 19 large, complex bank holding companies subject to the Fed’s Comprehensive Capital Analysis and Review (CCAR) for 2012 were stress-tested under a severe economic scenario that included real U.S.

GDP contracting “sharply through late 2012, with the unemployment rate reaching a peak of just over 13 percent in mid-2013,” while also assuming “that U.S. equity prices fall by 50 percent from their Q3 2011 values through late 2012 and that U.S. house prices fall by more than 20% through the end of 2013.” In addition, under the Fed’s adverse scenario, “foreign real GDP growth is also assumed to contract, with growth slowdowns in Europe and Asia in 2012.”

In order to pass the stress tests, the results had to show that the group of 19′s estimated Tier 1 common equity ratios would remain over 5% under the adverse economic scenario.

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