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Steve Chiotakis: Germany today had a hard time convincing investors to lay down cash for its debt, which means the troubles going on in Europe could be entering a new phase. And now the Federal Reserve says it wants big U.S. banks to undergo more stress tests to see if they can weather another big economic storm.
Morris Davis is with the Wisconsin School of Business, and a former Fed economist. Professor, thanks for being with us.
Morris Davis: Hey, thanks very much for having me.
Chiotakis: You know, I thought Germany was the safest place in the eurozone, the biggest economy certainly. What do you think this weak bond sale really means?
Davis: I think what it means is that investors are concerned about any asset that’s denominated in euros, because there must be a fear that the euro’s going to devalue — even more than it has. Otherwise, you’d think that Germany would have no problem issuing as much debt as it wants, given how safe its bonds seem to be.
Chiotakis: I know we saw that the Federal Reserve is planning on running these stress tests on some of the biggest banks in the country. Is that about the eurozone?
Davis: Some of it must be about the eurozone. I think some of it is just about routine testing. I think the Federal Reserve is running these tests with the hope that all the banks will pass or most of them will pass so that investors can remain confident about U.S. banks. So I think some of this is about showing to the general public that most of the U.S. banking system can withstand a severe shock to Europe.
Chiotakis: And what happens if a bank doesn’t pass?
Davis: That bank will be in trouble; that bank’s going to have to raise capital. The more ominous scenario is suppose a large set of banks don’t pass, then we’ll have decisions to make. The most likely outcome is those banks will be forced to raise capital.
Chiotakis: Morris Davis with the Wisconsin School of Business. Professor, thanks.
Davis: Thanks very much for having me.
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