Real gross domestic product (GDP) in the United States would fall 7.5% from its pre-recession peak, unemployment would spike to 10%, inflation would briefly dip below 1%, and asset prices would “fall sharply” under a “severely adverse” scenario for stress testing released by the Office of the Comptroller of the Currency (OCC) Friday.
The scenario is one of three the OCC released (the others being baseline and adverse scenarios) for covered banks and savings associations with $10 billion to $50 billion in assets.
The agency stressed that the scenarios are not economic forecasts from the agency. Rather, the OCC said, the scenarios are designed to assess the strength and resilience of covered institutions in varying economic environments.
The scenarios are published in accordance with the OCC’s final rule that implements stress test requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which requires covered national banks and federal savings associations with total consolidated assets of more than $10 billion to conduct annual stress tests (Dodd-Frank Act Annual Stress Tests, or DFAST).
“The results of the company-run stress tests provide the OCC with forward-looking information used in bank supervision and will assist the agency in assessing the company’s risk profile and capital adequacy,” the OCC said in a release.
More specifically, the scenarios propose:
- Baseline: Moderate economic expansion in U.S., with Real Gross Domestic Product (GDP) growing on average between 2% and 2.5% over the scenario period, with slightly stronger growth during 2018. The unemployment rate initially declines to below 4% before rising slowly and Consumer Price Index (CPI) inflation rises to a little under 2.5% at an annual rate before dropping back to about 2.25%. Treasury yields are assumed to rise modestly across the maturity spectrum. Equity prices rise by an average of about 5% per year. The baseline scenario for international economic activity and inflation features an expansion in activity, albeit one that proceeds at different rates across countries.
- Adverse: Weakening economic activity across all countries, accompanied by rapid declines in long-term rates and flattening yield curves. The U.S. economy experiences a moderate recession and the unemployment rate rises steadily, peaking at 7% in the third quarter of 2019. Financial conditions tighten for corporations and households during the recession and asset prices decline.
- Severely Adverse: Severe global recession accompanied by a global aversion to long-term fixed-income assets, resulting in a steepening yield curve. U.S. real GDP declines 7.5% from its pre-recession peak, with unemployment reaching 10% and CPI inflation briefly falling below 1% at an annual rate. Asset prices fall sharply. Internationally, severe recessions occur in the euro area, the United Kingdom, and especially Japan, and a shallow and brief recession in developing Asia. As a result of the sharp contraction in economic activity, all foreign economies included in the scenario experience a decline in consumer prices.