Fed's 2013 stress testing scenarios less severe: CRISIL GR&A
Fed's 2013 stress testing scenarios less severe: CRISIL GR&A Banks with greater US presence better placed
The impact on stress test outcomes in 2013 for individual banks will vary significantly. Says Sanjeev Sinha, President, CRISIL GR&A, “In general, US banks with a lower exposure to the Euro region and Asia are relatively better placed under CCAR-2013. Also, since the scenarios assume a sharp drop in housing and commercial real estate prices for the next 10 quarters, banks with a higher exposure to mortgage and securitized assets are likely to face more adverse outcomes.”
The Fed’s scenarios specify assumptions for a range of macroeconomic parameters in US and other regions. The Fed requires three scenarios under the Comprehensive Capital Analysis and Review (CCAR) 2013 – “supervisory baseline”, “supervisory adverse” and “supervisory severely adverse” compared to two under CCAR-2012. It has also provided greater transparency on the methods employed to generate the above scenarios. Of the three supervisory scenarios, CRISIL GR&A has analyzed the “supervisory severely adverse” scenario and compared to the “supervisory stress” scenario in CCAR-2012. Says Mr. Sinha, “Our analysis contains a one-to-one comparison of the 13 quarter projections of each of the 26 CCAR macroeconomic parameters in CCAR-2013 and CCAR-2012”. For this comparison, CRISIL GR&A has used a key statistical measure “Spread Average” defined as the average difference in spreads for each variable over 13 quarters between CCAR-2013 and CCAR-2012.
For the US, the CCAR-2013 assumptions across all major macroeconomic parameters are more favorable. Explains Anshuman Prasad, Director, Risk & Analytics, CRISIL GR&A, “Central to the assumptions for US is the Fed’s approach of using unemployment rate as the primary parameter in specifying stress scenarios. Lower unemployment rate projections in CCAR-2013 and their cascading effect on other parameters will likely have a positive impact on the stress testing outcomes.” There is a positive “spread average” in key asset price variables like House Price Index, Dow Jones Total Stock Market Index and the Commercial Real Estate Price Index in CCAR-2013 scenarios over CCAR-2012. Similarly, the 10-year Treasury yield and 30-year Mortgage rates assumed in CCAR-2013 are, for most quarters, below their corresponding CCAR-2012 equivalents leading to favorable stress outcomes for the banks. However, the BBB corporate bond yield values under CCAR-2013 are above their CCAR-2012 equivalents during the last 9 quarters of the analysis, suggesting higher risk in corporate exposures of banks.
Outside the US, however, for the 4 international regions - Euro area, Japan, UK and developing Asia, assumptions for macro-variables have become far more severe in CCAR-2013 including weaker real GDP growth and weaker Euro currency. The downturn assumed in developing Asia is more acute, underpinned by a sharply weakening Chinese economy.
The detailed analysis is available at www.crisil.com/
CRISIL GR&A has released a report titled ‘A comparative analysis of the US Federal Reserve’s CCAR 2013 & 2012 scenarios’. CRISIL GR&A is hosting a media teleconference today, November 19, 2012, to provide a briefing on its analysis:
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Roopa Kudva, MD & CEO, CRISIL
Sanjeev Sinha, President, CRISIL Global Research & Analytics
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About CRISIL Global Research & Analytics
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