US BANKS STRESS TEST RESULT ON MAY 7

The US Federal Reserve, Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation and Office of Thrift Supervision are using the Stress Test to determine whether the top 19 banks have enough capital to cover the loan losses for another two years of period if the market situation further deteriorate like economy contracts, severe unemployment and housing prices persists.
After the regulators review, in another one month down the line banks can review the results and bring more information to the discussion. The base line assumption for the stress test depends on forecasts like economic contraction of 2%, 8.4% jobless rate in 2009, followed by 2.15% growth and 8.8% unemployment in 2010. The authorities will also test the more adverse scenario like 3.3% contraction in 2009, accompanied by 8.9% unemployment followed by 0.5% growth and 10.3% jobless rate in 2010.

STRESS TEST EXPECTATION

On May 7 the authorities will publish the outcome of the stress test after the market hours, but the forecasts are already made public by various experts on this. According to Bloomberg reports, about 10 banks out of 19 banks need additional capital to cope with the ‘Financial Tsunami’. Banks May come with various proposals including conversion of preferred shares.

UNCOVERING THE TRACES OF PAST GLOBAL RECESSIONS

We are in the days of recession in which the whole global arena is feeling the heat. We have seen many major economies slowing in terms of production, income; increase in unemployment, crashing stock markets, interest rates being slashed again and again to support the economy and increase liquidity and offcourse handful of stimulus packages to boost the economic activities. The recent recessionary trend started in the year of 2007 and showed its fierce face early 2008 when the major banks started to file bankruptcy. This move created a devastating storm which traveled across the globe slamming stocks markets worldwide. Some of the economies moved into deflation and even defaulted due to GDP contraction. Now many will be keen to know the history of recession i.e. the occurrence of similar event in old times which had caused the economy to slow down and also the failure of banks. Yes, there is a history which is scrutinized here under.

History of recession can be traced back to the year of 1797 when the effects deflation of Bank of England had disrupted real estate sector in the US. It even had greatly affected the Great Britain as it was in an offensive with France. Then later in the year 1807 when the Embargo Act was passed by the United States Congress causing major crash in the shipping related industries. After 12 year, United States witnessed one of the major financial downtrend caused due to foreclosures, bank failures, unemployment and a slump in manufacturing and agriculture. This lasted for 5 years. These recessions recurred in the years 1837, 1857 and in 1873. The depression that started in the year 1873 lasted for 23 years and is called the Long Depression. The main reason was the collapse of Vienna Stock Exchange which spread like an epidemic throughout the world. In the 20th century, first depression occurred in the year 1907 which went on for 14 years. Then the First World War which started in the year 1914, triggered by the assassination of Archduke Franz Ferdinand of Austria, which lasted for 4 years pushed most of the economies into economic crisis which took shape after the world war 1 with hyperinflation in Europe due to decline in production after the war and the increase in unemployment rate caused due to returning military troops.

What many know about the history of recession starts from the Great Depression of 1929 which was caused due to the stock market crash that happened worldwide, collapse of banks in US etc. This triggered a global downturn which crossed countries and continents. Then again the world had to face the recession of 1953 which was caused due to the transferring of more funds for the national security and due to the stringent monetary policy put forward by Federal Reserve on fears of further increase in inflation during that time. The US had to face further recessionary situations in 1957 and 1960.

United States moved into another recessionary situation in 1973 after 13 years which was due to the increased spending on arms and ammunitions as US was in war with the Vietnam which had led to stagnation in the US. During this time the US as well as the world had to face the oil crisis and the stock market crash. The Iranian Revolution had its impact on the oil prices around the world which caused the so called 1979 energy crisis and also due to the new rule in power in Iran. This made US government to tighten the monetary policy as the inflation at that time was growing out of control. Then US faced two short recession periods one in 1990 and the second one after 11 year in 2001 due to collapse of dot-com bubble and the brutal September 11 attack which shook the world.

After this tragic phase, the government brought forward many stimulus packages inorder to boost the economy which included decreasing the lending rate inorder to spurt up the production and revive the economy. These measures where initially welcomed and cheered by the stock markets and economy revived from the depression. But the fire was active within getting ready for an outburst which happened in the later part of 2007 and is what we are in at this point in time.

The ongoing recession was caused due to the collapse of the housing markets which triggered the collapse of major reputed banks in the US and neighboring European countries. This resulted in a major solvency and liquidity crisis. Many of the countries started seeing a tremendous surge in inflation which was caused due to the growing oil price that was getting out of control. Stock markets crashed and fell like a ball and crashed like a crystal. The rest is infront of us.

This chronological recessionary picture shows us that United States get to experience the heat of recession every 5-10 years. This tells us to be cautious when the economies and stock markets boom abnormally.