Regulation

Fed to use its own projections for 2014 stress tests

126px-US-FederalReserveSystem-Seal.svg_3The Federal Reserve announced in a Monday email that the U.S. central bank would use its own projections for 2014 stress test scenarios of bank holding companies.

The central bank plans to use the projections to develop regulatory capital ratios for the various supervisory conditions, including baseline, adverse and severely adverse scenarios. In the past, the central bank relied on banks to provide the data.

“Independent balance projections permit a more consistent horizontal analysis, one that features common assumptions regarding total borrowing by households and businesses and firms’ market shares,” the Fed said, adding that the use of the bank’s data “reduces the horizontal comparability of the stress tests.”

Bank holding firms will, however, continue to use their own data to calculate capital ratios for company-administered stress tests.

For the 2014 stress tests, the Federal Reserve’s severe scenario features 11.25 percent unemployment in the U.S. in 2015, a five percent decline in GDP by the end of 2014 and a 25 percent decline in housing prices by the end of 2016.

The Fed said that if it had used its own data for the 2013 stress tests, it would have found different patterns related to assets and losses. Banks reported “major contractions in loans” and total assets over the past three recessions, data that is “at odds with historical experience”—Fed data from 1990, 2001 and 2007 showed that assets increased in each of the three recessions, and in the most recent two recessions, loans also grew.

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