Determining the Severity of Macroeconomic Stress Scenarios

Kapo Yuen

In the midst of the 2008 financial panic caused by the collapse of the subprime housing market, the US government responded with unprecedented measures, including liquidity provision through various funding programmes, debt and deposit guarantees and large-scale asset purchases. In February 2009, the US banking supervisors conducted the first ever system-wide stress test on 19 of the largest US bank holding companies (BHCs), known as the Supervisory Capital Assessment Program (SCAP) (Federal Reserve 2009a). The stress test required these 19 BHCs to undergo simultaneous, forward-looking exercises designed to determine whether they would have adequate capital to sustain lending to the economy in the event of an unexpectedly adverse scenario. By conducting this SCAP exercise, the supervisors hoped that it would reduce uncertainty and restore confidence in the US financial institutions. In their 2010 staff reports, Peristian, Morgan and Savino (2010), of the Federal Reserve Bank of New York, concluded that the SCAP might have helped to quell the financial panic by releasing vital information about the BHCs. They claimed, “While investors did not need supervisors to tell them which bank

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