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Possible Scenarios

The circumstances smaller banks are required to consider may be tailored to their size.

“One scenario for small banks may be the failure of one or more large financial institutions,” says Ed Harllee, a partner at Williams Mullen. “It’s also going to be interesting to see whether one of the scenarios is something like the collapse of the secondary mortgage market or the secondary student loan market.”

The baseline scenario will reflect the consensus views of the economic and financial outlook based on the forecasts of professional forecasters, government agencies and other public sector organizations such as the International Monetary Fund or the Organization for Economic Co-operation and Development. The severely adverse scenario generally will reflect conditions characterizing a post-war U.S. recession. Conditions under the adverse scenario will fall somewhere between the baseline and severely adverse.

Under the supervisory scenarios regulators distributed for the 2012 Comprehensive Capital Analysis and Review, for instance, the severely adverse hypothetical included among its numerous variables a peak unemployment rate of 13 percent, a 50 percent drop in equity prices and a 21 percent decline in houses prices.

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