The Stressfree Stress Test
The Fed et al published their guidelines for the Supervisory Capital Assessment Program today, 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 show 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.
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?