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Unemployment, exchange rates, prices, income, and interest rates are some of the economic factors that will reveal whether banks in the U.S. are armed with robust capital planning processes and sufficient capital to continue operations during times of economic or financial stress. These are also factors that reveal the expectations of economic forecasters.
The Federal Deposit Insurance Corporation (FDIC) released these economic scenarios on Tuesday. They will be used by banks and financial institutions with total consolidated assets of more than $10 billion for stress tests required under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
The baseline scenario represents expectations of private sector economic forecasters. However, the adverse and severely adverse scenarios are not forecasts, but are hypothetical scenarios designed to assess the strength and resilience of financial institutions and their ability to continue to meet the credit needs of households and businesses under stressed economic conditions.
Under the base scenario, real GDP Growth is expected to remain in the range of 2.5 percent in 2018, with slight changes in each quarter. Unemployment is expected to fall to 3.8 percent by the end of 2018, while mortgage rates are expected to rise to 4.5 percent by the end of the year from 4.1 percent in the current quarter.
The House Price Index (HPI), which is the price index for owner-occupied real estate is also expected to rise to 199.3 points during the year. Though inflation is expected to remain stable at 2.1 percent across the year, disposable income could fall from 4 percent at the beginning of 2018 to 2.8 percent towards the end of the year.
The results of these stress tests provide the FDIC with forward-looking information used in bank supervision and assist the agency in assessing the company’s risk profile and capital adequacy. The baseline, adverse, and severely adverse scenarios for 2018 were developed in coordination with the Board of Governors of the Federal Reserve System and the Office of the Comptroller of Currency.
