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Leading U.S. banks to undergo Fed stress tests

John Dimsdale Nov 23, 2011

Steve Chiotakis: Big U.S. banks again will go on the treadmill for a series of stress tests. The Federal Reserve says this time it’s to see whether any of them are susceptible to European debt. Or would be able to weather a disastrous economic storm.

Marketplace’s John Dimsdale is with us live from our Washington Bureau with the latest. Good morning John.

John Dimsdale:Hey Steve.

Chiotakis: Didn’t we already go through stress tests for American banks?

Dimsdale: You’re right, but regulators worry that Europe’s in for a bumpy ride that could cause another credit freeze — not unlike the one banks went through three or four years ago. So the Fed’s requiring banks to test several scenarios to see how a severe economic downturn — even a recession, where unemployment hits 13 percent — would affect the banks’ reserves. And as you say, they went through these tests a couple years ago, and regulators said then that they’d probably be a one time deal.

But Guy Lebas at Janney Montgomery Scott says these tests need to be run over and over again.

Guy Lebas: Whether or not the Fed publishes the results of the stress test, as a good regulator they should be doing them for a good long time. It’s a good policy to make sure there are no unexpected risks that could threaten the solvency of individual banks or the financial system as a whole.

Chiotakis: So John, will the tests give investors more trust in our banks and their strength, despite Europe’s weakness?

Dimsdale: They are designed to do just that — to show that banks are resilient. But LeBas points out that they need to be updated from time to time because the threats to banks are changing.

Chiotakis: Marketplace’s John Dimsdale, reporting from Washington. John, thanks.

Dimsdale:My pleasure.

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