The Federal Reserve will perform more stress tests

Marketplace Staff Jan 10, 2011
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The Federal Reserve will perform more stress tests

Marketplace Staff Jan 10, 2011
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STEVE CHIOTAKIS: It’s been more than a year and a half since the Federal Reserve put the nation’s 19 largest banks on the treadmill — making sure they were healthy enough to go on in the depths of the financial crisis. And this week, the Fed will be back with more stress tests for the banks, looking at whether they can raise dividends and buy back shares.

Francesco Guerrera is U.S. Finance Editor for the Financial Times and he’s with us from New York. Good morning.

FRANCESCO GUERRERA: Good morning.

CHIOTAKIS: What are federal officials looking at with the new round of stress test?

GUERRERA: The main concern that federal officials have is whether banks have enough capital to be able to raise dividends and buy back shares. In other words return positive profit to shareholders, so they want to make sure that they’ve got enough capital to do just that.

CHIOTAKIS: To get money back to the investors, right?

GUERRERA: That’s right. Banks have been in this rather awkward position, where by the profits have been going up, the pay packages have been going up, and shareholders have been saying, “Look, give us some of the money back, right?” And banks haven’t been able to do it because regulators have told them not to. So this is the moment they’ve been waiting for in order to placate their investors by giving some of the money that they’ve been making back.

CHIOTAKIS: There was a lot of criticism during the first round of stress tests back in 2009 that they weren’t strong enough — they didn’t offer this big picture of what’s really going on with the banks. Are we going to get a bigger picture of bank health out of these new tests?

GUERRERA: For start, the big difference between this test and the ones we had in 2009 is that this test will not but publicized, so we won’t know who passed or failed, it’s all going to be done in secret. Those tests in 2009 were publicized. And I think it’s fair to say that they achieved the objected that the government set itself which is to calm down the market by assuring people that there weren’t any black holes in the financial system.

CHIOTAKIS: And do you think that these will be secretive, that’s going to serve that aspect of it, that it will calm the market?

GUERRERA: I think the market’s not that panicked at the moment. I think it’s a shame it will be secretive, because the people like us and investors and analysts would like what’s in there and would like to see how the banks are doing under diverse scenarios for microeconomics growth. However, I think the government would argue that this is a more normal test, and normal tests don’t get publicized.

CHIOTAKIS: Francesco Guerrera with the Financial Times, thank you.

GUERRERA: Thank you.

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