Stress Tests Are Over. The Stress Isn’t.

not all banks will be able to earn enough to see them through. And while no one knows how long our economy will remain under pressure, Ms. Tavakoli said she was certain that the stress tests’ assumptions on worst-case losses at banks were too rosy. Under the government’s so-called adverse scenario, for instance, banks may experience losses of 8.8 percent over the next two years on first mortgages they hold. A more likely figure, Ms. Tavakoli says, is 10 percent. “Given what has happened with the economy and unemployment, they are in massive denial,” she said. Losses recently seen in Fannie Mae’s portfolio support this view. In the first quarter, its subprime loans had average losses of around 68 percent; the Fed expects two-year losses in subprime to be, at worst, 28 percent.