The Federal Reserve today released the three economic and financial market scenarios that it will use in the next round of the Comprehensive Capital Analysis and Review process for 38 of the nation’s largest financial institutions and foreign firms with U.S. operations. Twenty of these firms with less complex operations will only be subject to the quantitative portion of CCAR, relieving them from the qualitative evaluation of their capital planning processes.
The three scenarios — baseline, adverse and severely adverse — include 28 variables such as GDP, unemployment rate, stock market prices and interest rates. The baseline scenario is in line with average projections from surveys of economic forecasters.
Under the severely adverse scenario, the world would plunge into a severe recession, which would include a U.S. unemployment rate rising to 10 percent, accompanied by a steepening Treasury yield curve. The adverse scenario features a moderate recession in the U.S., as well as weakening economic activity across all countries.
Of the participating banks, six with large trading operations will participate in an additional test of reactions to a global market shock, and eight banks will be required to incorporate a counterparty default scenario. Capital plans must be submitted to the Fed by April 5. For more information, contact ABA’s Hugh Carney.