Do We Need a More Stressful Test?

The Fed et al published their guidelines for the Supervisory Capital Assessment Program yesterday, defining the parameters for the base case and adverse scenarios to be used in the bank stress tests. As Paul Krugman points out the stress test scenarios are somewhat of a letdown. The summary table below shows the base case and adverse scenario assumptions for GDP growth, unemployment and home price appreciation over the next two years. The original can be found here.

(Click to enlarge)

I was under the impression that a stress test should be designed to take a look at possible outcomes under extreme scenarios. To me, the above hardly seems extreme - especially when comparing the HPA and unemployment numbers to what some of the MBS hedge fund managers I talk to on a regular basis tell me they are using as their “conservative” assumptions: -35% for home prices, unemployment in the mid teens. Is the government putting the banks through a useless exercise?

Comments

[rogersails]

Gee - Maybe they'll stress test the Fed and publish the results. Or Not

2009 Feb 26 02:45 AM

[jack kreg]

absolutely, with the FED's running $2T annual deficits and Pelosi giggling with glee, its time to say, how to we re-capitalize the $12T current Fed debt, and the near-future (a few decades) of unfunded retirement obligations, nearing $60T.
Now, thats a stress test that says corrupt politicians have failed us, and should not be flying around on taxpayer funded jets, taking bribes in Chicago, or stashing their illegal campaign funds in the Freezer!!

The Feds need a stress test, and after failing, they all should be fired, or at least reduced to minimum wage, which would be about right for their value to the American taxpayer.

2009 Feb 26 12:12 PM