Each participating financial institution was instructed to analyze potential firm-wide losses, including in its loan and securities portfolios, as well as from any off-balance sheet commitments and contingent liabilities/exposures, under two defined economic scenarios over a two-year time horizon (2009 – 2010).
In addition, firms with trading assets of $50 billion or more were asked to estimate potential trading-related losses under the same scenarios.
Based on those discussions, the supervisors assessed institution-specific potential losses and estimated resources to absorb those losses under the baseline and more adverse case, and determined whether the institution had a sufficient capital buffer necessary to ensure it had the amount and quality of capital necessary to perform its vital role in the economy.
To aid financial institutions in their ongoing risk management practices, the supervisors have also put together an alternative “more adverse” scenario.
In particular, based on the historical accuracy of Blue Chip forecasts made since the late 1970s, the likelihood that the average unemployment rate in 2010 could be at least as high as in the alternative more adverse scenario is roughly 10 percent.
The capital assessment is intended to capture all aspects of a financial institution's business that would be impacted under the baseline and more adverse scenarios.
Supervisors will carefully evaluate the forecasts submitted by each financial institution to ensure they are appropriate, consistent with the firm's underlying portfolio performance and reflective of each entity's particular business activities and risk profile.
There will be ample opportunity for discussions between the financial institutions and supervisory agencies regarding the loss estimates and earnings forecasts during the capital assessment process.
The nineteen bank holding companies being stress-tested are as follows: The capital needs found by the test are based on the adverse scenario for the recession.