Fed to stress-test banks with housing scenarios
The Federal Reserve said it will scrutinize how 31 large U.S. banks, including JPMorgan Chase & Co. and Citigroup Inc., would respond to a plunge in equity and housing prices and a sharp downturn in the global economy.
The annual tests, using hypothetical scenarios that are not forecasts, are the cornerstone of the Fed’s efforts to prevent a repeat of the 2008 financial crisis and to gauge the ability of banks to withstand economic turmoil.
The “adverse and severely adverse scenarios” are designed to assess “the strength of banking organizations and their resilience to adverse economic environments,” the Fed said in documents released today.
The “adverse” scenario outlined by the Fed differs from last year’s in that it features a higher, flatter yield curve for Treasuries — much like the one released two years ago, according to the Fed.
In the Fed’s “severely adverse” scenario, stocks fall by 60 percent by the fourth quarter of 2015 and housing prices drop by about 25 percent. Unemployment peaks at 10 percent, gross domestic product declines by 4.5 percent and the price of oil rises to $110 per barrel. Long-term Treasury yields fall to 1 percent.
The banks have to account for a mild, three-quarter U.S. recession starting in the last quarter of 2014, with real gross domestic product falling half a percent and unemployment of more than 7 percent and reaching 8 percent by the end of 2016, the Fed said in the report.
The decline in home prices “should be viewed as particularly relevant for states or metropolitan areas that have experienced brisk gains in house prices during the past couple of years,” the Fed said.
Source: bloomberg- Fed to stress-test banks with housing scenarios
