Economic Forecasts In Bank Tests Miss Their Mark

DANIEL WAGNER

WASHINGTON (AP) — All but one of the 19 largest banks have raised the extra capital cushion regulators said they'd need to withstand a deeper recession — a sign, the Treasury secretary said, of how much the financial system has improved since the crisis began.

But the banks' capital needs were based on unrealistic economic projections. Some have proved too rosy, others too grim.

For example, the test envisioned unemployment reaching 8.9 percent this year; it stands at 10.2 percent.

On the other hand, the tests assumed housing prices would fall 22 percent this year in a worst-case scenario. Instead, they fell 5.5 percent in the first half of the year and have risen for the past three months.

Earlier this year, the Obama administration subjected the 19 largest banks to "stress tests." The goal was to boost confidence in the financial sector by showing how strong banks' balance sheets were. Regulators used a series of economic projections to see if banks could withstand the losses they would suffer in case of a deeper-than-expected recession.