Regulation

OCC publishes Dodd-Frank stress test scenarios

occ-seal-slideThe OCC released on Friday economic and financial scenarios that will be used by examiners during the next annual round of Dodd-Frank-mandated stress tests.

Dodd-Frank requires national banks and federal savings institutions with consolidated assets of $10 billion or more to conduct annual stress tests, and the OCC is required to provide the required scenarios by Nov. 15 of each year.

The scenarios include baseline, adverse and severely adverse situations, and each scenario includes 28 variables, including economic activity, unemployment, exchange rates, prices, incomes and interest rates. Scenarios for institutions with over $50 billion and for institutions with between $10 billion and $50 billion are expected to be the same.

Institutions that are required to undergo stress tests are also required to publish a summary of the results on their website or any forum that is accessible to the public.

The stress tests are intended to demonstrate how a bank and its assets would perform in the event of a financial crisis, housing bust and severe economic downturn—part of an effort to prevent a repeat of the 2008 financial crisis when some of the world’s largest banking institutions collapsed.

In the 2014 adverse scenario, which begins in the fourth quarter of 2013, unemployment is at 9.25 percent, mortgage rates increase and the yield on the 10-year Treasury note increases to 5.75 percent. A slow recovery begins in 2015, with GDP increasing two percent that year and nearly 3.75 percent in 2016, and unemployment declining to 8.75 percent at the end of 2016.

In the severely adverse scenario, unemployment peaks at 11.25 percent in 2015, stocks fall nearly 50 percent, real GDP declines by nearly 4.75 percent between the third quarter of 2013 and the end of 2014 and housing prices decline by 25 percent. Short-term interest rates remain near zero through 2016, and the yield on the long-term Treasury note falls to one percent in 2014 before increasing to two percent by the end of 2016.

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