The Federal Reserve to start stress tests on U.S. banks

John Dimsdale Nov 23, 2011

The Federal Reserve to start stress tests on U.S. banks

John Dimsdale Nov 23, 2011

Jeremy Hobson: For months now most U.S. banking analysts have insisted that American banks wouldn’t be brought down by a European financial crisis. But just to make sure, the Federal Reserve announced yesterday that it is going to put U.S. banks through a new round of stress tests.

Our Washington bureau chief John Dimsdale joins us live with the details. Good morning, John.

John Dimsdale:Good morning, Jeremy.

Hobson: So, of course the U.S. banks have already been through one round of stress tests — after the financial crisis here in the U.S. — why this new round?

Dimsdale: Well, the regulators are worried that Europe’s in for a bumpy ride, which could cause a credit freeze not unlike the one that banks went thru here in 2007 and 2008. So the Fed is running some scenarios on the bank balance sheets — like what would happen  in a severe recession where growth falls as much as 8 percent and unemployment hits 13 percent. At his last news conference earlier this month, Fed chairman Ben Bernanke was asked about the effect of Europe on U.S. banks.

Ben Bernanke: We can look at our own financial institutions and try to access exposures and linkages between our institutions and those in Europe and the soveirgn debt in Europe. And we’ve been doing that on consistent basis.

But you know, this is a much more formal, stepped-up process. Banks are going to be required to report back to the Fed on the results of these stress tests by middle of January.

Hobson: But John, the European banks just went through a round of stress tests and everybody said they were ineffective — they didn’t really tell us how the banks were doing. Why do people think that the tests here are going to give investors more confidence?

Dimsdale: Well, these are pretty severe scenarios, designed to test whether the banks are resilient and whether regulators are on top of the situation. We’re just going to have to see.

Hobson:Marketplace’s Washington bureau chief John Dimsdale. Thanks.

Dimsdale:Thank you.

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