Word: stress
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Dates: during 2000-2009
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...Take the unemployment rate: the adverse scenario of the stress test is based on an average unemployment rate of 10.3% for 2009. However, at the current pace unemployment is more likely to hit the 11% mark. On a quarterly basis, the rate of unemployment is already well beyond the levels assumed by the adverse scenario for the end of the first quarter of 2009. Similar considerations apply to U.S. real GDP and home prices. (Read about the top 10 bankruptcies...
...results of the tests did not carry any surprises with respect to what was leaked to the press in the past few weeks. Ten of the institutions participating in the Supervisory Capital Assessment Program (the stress tests) will have to work to raise capital in the months ahead...
...what can be taken away from the stress-tests exercise? That even lenient stress tests show that several large banks still need additional capital. Beyond that, there are more questions: Will the capital-requirement prescription unveiled by the stress tests be enough? And how will banks prop up their balance sheets...
...answer to the first question is no. Recapitalization needs will likely exceed what the current stress tests suggest since macroeconomic conditions are bound to be worse than the consensus anticipates, making the adverse scenario of the stress tests look mild. At this point in time, banks are still facing well over $1 trillion in losses over the next couple of years, even if low short-term interest rates make new loans very profitable. Moreover, according to RGE Monitor, real U.S. GDP growth will inch back into positive rates only toward the end of 2009 rather than at the beginning...
...ahead. The economy is still very weak, and while the pace of contraction in real activity is slowing, the global contraction is going to be with us for a while longer. Indeed, a global recovery is conditioned on the health of the U.S. financial system. And even after the stress tests, the health of that system is still in question...