TEXT-Fitch: Fed stress scenarios tough for 2013 CCAR process

Fri Nov 16, 2012 10:46am EST

Nov 16 - The Federal Reserve's 2013 stress test scenarios for U.S. banks,
which include a slowdown in Asia's developing economies on top of severe U.S.
and euro zone recessions, are still as tough as last year, according to Fitch
Ratings. However, we believe banks are generally better positioned and
capitalized this year to be able to cope with the shocks the stress scenarios
present. 

The 2013 Comprehensive Capital Analysis and Review (CCAR) requires banks to 
ensure they are adequately capitalized to withstand a "severely adverse" 
scenario, with assumptions broadly similar to last year's "supervisory stress" 
scenario. The tests will determine whether dividends and share repurchases can 
go forward. We believe the opportunity for banks to revise their distribution 
requests will help avoid the lengthy waiting period experienced last year. 

A new aspect of the test is a much more substantial slowdown in developing Asia.
We believe this will not cause significant stress losses for most U.S. banks. 
Still, major banks with more substantial corporate and capital markets 
operations could suffer. Citigroup's extensive consumer banking operations in 
Asia, along with its corporate and capital markets activities, make the bank 
more vulnerable to the slowdown assumption for the region.  

The Fed wants the banks to deal with shocks globally, rather then just in the 
U.S. As such, the "severely adverse" scenario assumes total real GDP in the euro
zone contracts by 5.75% during the recession, with only modest recovery in 2014.
It has been fine-tuned from a year ago to more greatly differentiate between 
core and peripheral economies. 

The global market shock assumptions are likely to drive the most significant 
stress losses at the major U.S. trading banks. Some of the market stresses are 
lower. For example, this year a 160-bp increase is applied to the 'BBB' 
corporate yield rather than the 196 bps for the 2012 CCAR. However, we still 
expect the applied market shocks to drive large stress losses for the major 
banks with substantial capital markets operations, such as Citigroup, JP Morgan 
Chase, Bank of America, Goldman Sachs, and Morgan Stanley.

The "severely adverse" scenario is intended to present a severe economic and 
market shock similar to that experienced in the second half of 2008. The stress 
test includes a sharp 6.1% annualized drop in U.S. GDP during the first quarter 
of 2013, a 21.1% collapse in home prices, and 20.9% fall in commercial real 
estate. 

A key difference in the US.. recessionary assumptions is a lower peak 
unemployment rate at 12.1%. Last year the Fed assumed unemployment would reach 
13.1%. We believe a lower peak rate is likely to reduce consumer-related 
chargeoffs under the test, relative to last year, even though the starting point
is lower due to unemployment rates falling moderately. 

As part of the CCAR, the Fed will be reviewing capital adequacy, banks' internal
processes for ensuring capital adequacy, and plans for capital distributions to 
shareholders. The 2013 CCAR applies to 19 large U.S. bank holding companies. 
Results of the stress test are likely to be released next March.

The above article originally appeared as a post on the Fitch Wire credit market 
commentary page. The original article can be accessed at www.fitchratings.com. 
All opinions expressed are those of Fitch Ratings.
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