Sorry for the delay reporting this but better late than never!
On May 7 the Federal Reserve System published its report on stress tests on 19 major US banks. They used economic scenarios, comparing a “baseline” state assuming the economy follows their predicted trend with a “more adverse” state where the economy performs worse than expected. The result is that they expect the 19 banks to accrue debts of $600billion during 2009 and 2010 assuming adverse economic conditions. Of this, $455billion would be for consumer debt. This underlines the importance of understanding risk within consumer credit portfolios. Research in this area lags behind corporate credit, but consumer credit accounts for much more of bank risk. The bottom line is that between them the banks are short of capital requirements by $75billion.
It is also worth reading the BBC report on this stress test.
Several US financial commentators have dismissed these stress tests as too weak and it has been done simply to allay the fears of the public and investors in the US banking system. The conditions used by the Fed to represent “more adverse” conditions were not sufficiently adverse and some of the indicators, such as unemployment rate, are already close to the value chosen for adveerse conditions (ie adverse is normal!). For further details, Professor Campbell Harvey at Duke University (NC) gives a detailed criticism.
Posted by agbellotti 
Posted by agbellotti 
Posted by agbellotti 