The Supervisory Capital Assistance Program-Part VI

This is the sixth in a series of articles on the SCAP. 

Macroeconomic Scenarios for SCAP:  When the supervisors originated the SCAP, they had to consider its implementation with a particular background in mind.   This background or scenario had to have all the components of the actual economic environment.  

As the current economic situation is a result of the developments over a period of time, the historical perspective also had to be factored into the calculations.   Apart from this, the supervisors had to contend with the issue of forecasting a future scenario, on the basis of the past developments.  

As the current situation does not offer an encouraging prognosis, the supervisors settled upon a worse-than-the-present future scenario.   In this scenario, dubbed as the more adverse scenario, the supervisors foresaw a further deterioration in the economic situation, and the persistence of such a situation, for some time to come.

The supervisors, thus, provided two scenarios to the participating firms, to submit their projections or forecasts of the losses expected to be suffered by them, and the sources of funds and the adequacy of the same, to absorb the losses thus identified.   It would appear that the supervisors erred on the side of caution, in hypothesizing the second scenario. 

The BHCs were advised to align their assumptions in their forecasts with those behind the two scenarios presented to them, and to ensure that their specific business activities were studied against these assumptions, before making the forecasts.

The idea behind it was to make the forecasting of the firms as accurate as possible, to enable the right decisions to emerge from the exercise.   For instance, as housing loans were a major source of bad loans for the BHCs in the recent past, they were advised to  factor these loans  in their calculations of projected loan losses.   It was also felt that projections thus made under the two macroeconomic scenarios would reveal the sensitivity of the firms to various changes taking place in the economic conditions.

In arriving at the assumptions for real GDP growth and unemployment rates for the years 2009 and 2010, the SCAP teams relied on the average of projections made for these items by the Consensus Forecasts, the Blue Chip Survey, and the Survey of Professional Forecasters.   The Consesus Forecasts are carried out by Consensus Economics, a macroeconomic survey firm.  This forecast is the arithmetic average of all the individual predictions, collected for a sinle economic indicator, in a monthly survey.   The Blue Chip Survey is conducted by Aspen Publishers, who are said to have considerable expertise in conducting surveys in economics and interest rates.   And finally, the Survey of Professional Forecasters is run by the Federal Reserve Bank of Philadelphia, and is one of the oldest quarterly surveys of macroeconomic forecasts in the United States.

The SCAP supervisors have reposed faith in the value and relevance of the forecasts of the above organizations, to arrive at a fair assumption for real GDP growth and unemployment rates for the years 2009 and 2010.

                                                                                                         To be concluded. 

Acknowledgement:  Adapted from the official document of the Board of Governors of the Federal Reserve System.