The Federal Reserve will stress-test the 31 largest U.S. banks, those with at least $50 billion in assets, in an attempt to restore confidence in the country’s banking system, and the six largest must also pass tests of their trading operations.
Bloomberg reported that the tests will use severe scenarios, with parameters such as an unemployment rate of 13%, an 8% fall in GDP and a 52% fall in stocks from Q3 2011 to Q4 2012. In addition, the six banks facing trading tests, according to a Reuters report, will confront price and rate movements that occurred in the second half of 2008, as well as “potential sharp market price movements in European sovereign and financial sectors.” Those banks are Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo.
The Fed said that the tests do not represent its outlook for the economy, but instead are intended to make banks’ capital adequacy more transparent by showing whether they can handle a deeper downturn and financial market shock. Karen Shaw Petrou, managing partner at Federal Financial Analytics, a Washington, D.C., regulatory research firm whose clients include the largest banks, said of the strategy, “This is a daunting test. The Fed’s credibility as a tough guy can’t be challenged based on this.”
Nancy Bush, a longtime bank analyst and contributing editor at SNL Financial, was quoted saying, “They are clearly worried about the issue of Europe. In a time of risk aversion and concern, you need transparency.”