How Realistic Were the Economic Forecasts Used in the Stress Tests?
Ken Beauchemin and Brent Meyer The results of the “stress tests” came out last Thursday, and we can now see what three months of intense scrutiny of 19 of the countries&srquo; largest bank holding companies has revealed about the amount of capital they are likely to need to withstand a worse-than-expected recession. Since the April 24 release of the Federal Reserve white paper describing the process, a number of observers have suggested that the economic forecasts used in the tests are not severe enough, and may result in insufficient capital requirements. Regulators tested the banks against two sets of assumptions for GDP, unemployment, and housing prices. The “baseline” scenario averaged the February forecasts of real GDP and the unemployment rate from the Blue Chip Survey, Consensus Forecasts, and the Survey of Professional Forecasters. The assumptions for house prices followed a path implied by futures on the Case-Shiller Housing Price Index. The second, “more adverse” scenario rep
