Stress Test

03/11/2012

On Nov. 22, the Federal Reserve asked 31 U.S. banks with more than $50 billion in assets to test their capital levels against an economic scenario even worse than the 2008 recession. Results of the Federal Reserve's stress test for the nation's largest banks will be released soon. It is crucial to understand what the stress test is to accurately evaluate the results.

The stress test IS:

  1. An evaluation of a bank's capital under a hypothetical scenario of extreme stress
  2. One of the tools for the Federal Reserve to determine a bank's capacity to pay dividends and other capital distributions

The stress test IS NOT:

  1. A forecast or projection for the U.S. economy
  2. An indicator of the current solvency of a bank
  3. A reflection of a bank's actual capital position during a crisis, wherein a bank could choose to take multiple mitigating courses of action

The stress-test scenario, if it ever occurred, would be catastrophic for nearly everyone. According to Moody's Analytics, if the scenario were to come true, 4.5 million additional jobs would be lost by the end of 2012, national debt will increase by an additional $1 trillion by mid-2013 and retail sales would be down 10% by the end of 2012. In particular, car sales would drop off by 5 million (33% lower than projected sales).

For more information about the stress tests, view this week's Fast Facts: Stress Test.

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