Bank Stress Tests Have Many Functions
March 12, 2012 by UPI - United Press International, Inc.
WASHINGTON (UPI) — Finance experts say the new round of federal stress tests for U.S. banks expose concerns for consumers, bankers and regulators.
“Everybody wants to avoid headlines,” The New York Times quoted industry analyst Chris Kotowski at Oppenheimer as saying. “People are angry at the banks and both the banks and the regulators just want to do something to show we’re working our way back towards normalcy. That’s what everyone is craving.”
Banks are hoping to avoid embarrassing headlines. More than that, shareholders are looking for the U.S. Federal Reserve to give banks the green light to increase dividends.
Regulators, on the other hand, want to show they can be tough, given the financial crisis that began in 2008 took almost everybody by surprise.
The latest round of Federal Reserve stress tests are meant to prove that the country’s 19 largest banks can withstand severe economic strains.
The banks are being judged against hypothetical scenarios that include a 50 percent drop in stock values, a contraction of 8 percent in the gross domestic product and 13 percent unemployment. In addition, the Times reported, the banks are being subjected to a new possibility, that of a severe shock to stock markets in Europe, where Greece, Ireland and Portugal have already accepted international bailout loans, but where the debt crisis appears to be far from over.
The results of the latest round of testing will be released Thursday.
“It’s going to end up being a compromise between regulatory constraints and what the banks desire,” said Kamal Mustafa, chairman and chief executive of financial industry consulting firm Invictus.