The FDIC and OCC have released the economic scenarios that will be used by certain 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 supervisory scenarios include baseline, adverse, and severely adverse scenarios, as described in the OCC's final rule that implements stress test requirements of the Dodd-Frank Act.
The baseline, adverse, and severely adverse scenarios include key variables that reflect economic activity, including unemployment, exchange rates, prices, income, interest rates, and other salient aspects of the economy and financial markets.
The baseline scenario represents expectations of private sector economic forecasters. The adverse and severely adverse scenarios are not forecasts, rather, they 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.
Covered institutions are required to use the scenarios to conduct annual stress tests. 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.