Posts Tagged ‘FDIC’

Already below the adverse scenarios

March 31, 2009

The Federal Deposit Insurance Corporation (FDIC) is an agency “created by the Congress that maintains the stability and public confidence in the nation’s financial system by insuring deposits, examining and supervising financial institutions, and managing receiverships.” They were heavily involved in the bailout of Citi and have been active in the so called “Legacy Loans Program”, which is the vehicle via which the US taxpayer is buying all those dodgy “toxic” mortgages.

A few months ago, the FDIC released this FAQ, outlining how they would determine if financial institutions “have sufficient capital buffers”. To do that, they devised two scenarios: a “baseline” and an “adverse” one. The baseline scenario is some sort of expert expectation, while the adverse is a stress that is “unlikely”, but “cannot be ruled out”, as their document explains.

House price scenarios used by the FDIC

House price scenarios used by the FDIC

The index they use is the Case-Shiller index of house prices in 10 US cities. This index is reported monthly with a two-month lag. The average index value over the 3rd quarter of 2008 is 165.92 which is the base of the figure above. Today we got the index value for January 2009, which was 158.04 or a drop of 4.75%. This is the first month of the scenarios that the FDIC constructed, and it seems to me that we are already covered the baseline scenario for the whole quarter. We are also en route to go through the adverse scenario pretty soon.

Well it is only one month, but certainly not an encouraging one. The US taxpayer must be delighted with the guys that buy loans for her…