The Supervisory Capital Assistance Program-Part VII

Macroeconomic scenarios for SCAP(contd):  As we have seen the supervisors in charge of implementing the SCAP, drew up two scenarios, to arrive at the required level of capital for the nineteen BHCs.   The baseline scenario represented the common view of those conncected with the exercise, about how severe the economic downturn would be, and for how long it would last.   There was a consensus on this issue.

The second scenario envisaged more severe economic conditions, with correspondingly more serious consequences, and also lasting for a much longer duration than expected.   Even though the economic recession under the second scenario was expected to be more severe and last longer, the supervisors, however, did not assume it to be the worst case scenario.   They intended the scenarios for the stress tests to be quite severe, but also realistic, and not unduly devastating.

In arriving at the above, they relied upon data from private forecasters, especially the Blue Chip forecasts over a long period of time, since the 1970s.   From these forecasts, it could be known that the possibility of average unemployment rate in 2010 being as high as in the second more adverse scenario was about 10%.   Other forecasts revealed that there was a 15% chance of real GDP growth being as low and unemployment as high as assumed in the more adverse scenario.

In the matter of the underlying assumptions in respect of house prices, under the baseline economic scenario, the supervisors relied upon the Case-Shiller 10 city composite index, and the Blue Chip survey.   In case of the more adverse scenario, house prices were projected at about 10% lower at end of 2010, compared to the baseline scenario.

The SCAP supervisors made the following projections, under the baseline and the more adverse scenarios, with regard to the important factors determining the economic situation:

1. As per the baseline scenario, the real GDP growth is expected to be -2.0 in 2009, and 2.10 in 2010;  the civilian unemployment rate is expected to be 8.4 in 2009, and 8.8 in 2010;  and the house prices at -14 for 2009, and -4.0 for 2010.
2. As per the more adverse scenario, the real GDP growth is expected to be -3.3 in 2009, and 0.5 in 2010;  the civilian unemployment rate is expected to be 8.9 in 2009, and 10.3 in 2010;  and house prices at -22.0 in 2009, and -7.0 for 2010.
3. As per the Consensus Forecasts, the real GDP growth is expected to be -2.1 in 2009, and 2.0 for 2010;  and the civilian unemployment rate is expected to be 8.4 in 2009, and 9.0 for 2010.   As per the Blue Chip Survey, the real GDP growth is expected to be -1.9 in 2009, and 2.1 for 2010;  and civilian unemployment rate at 8.3 in 2009, and 8.7 for 2010.   And as per the Survey of professional forecasters, the real GDP growth is expected to be -2.0 in 2009, and 202 for 2010;  and the civilian unemployment rate at 8.4 in 2009, and 8.8 for 2010.

From the above it is clear that, whereas the baseline scenario figures are an average of the other forecasters, the more adverse scenario figures are much hjigher on the negative side.   And even these figures are not considered to be the worst case scenario figures.

This then is the broad outline of the macroeconomic scenarios under which the SCAP exercise was undertaken.

                                                                                              To be concluded.

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