The Stress Scenarios

Lourenco Miranda

INTRODUCING THE SCENARIOS

Under the requirements of CCAR and DFAST, a BHC is annually required to undergo stress tests based on at least five different economic scenarios. The regulators provide the first three economic scenarios: baseline, adverse and severely adverse scenarios. The regulators build those scenarios in a way that they show natural progression in stress from the baseline to the most severe. The BHC builds the other two scenarios: baseline and the bank stress scenario. The stress test economic scenarios describe conjectural sets of conditions designed to evaluate the strength of financial institutions and their resilience to antagonistic economic environments. According to the regulators, the supervisory scenarios are not forecasts, but are based on a series of assumptions related to the macroeconomic environment.

The Federal Reserve creates the “supervisory” scenarios, including the additional macroeconomic scenarios and the global market shock. It is important to note that the scenarios provided by the Fed are not forecasts but hypothetical scenarios to be used to assess the strength and resilience of bank capital in baseline and stressed economic and financia

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