Federal Reserve releases banks’ stress test results

Heidi Moore Mar 13, 2012

Kai Ryssdal: This is radio, so you can’t see this, but I’m kind of stifling a yawn here as I tell you that the Federal Reserve ended its meeting today. Nothing new to report on the economy.

But then at the end of the day, Mr. Bernanke and Co. showed they’ve still got it — it being the ability to surprise the markets: The Fed released the results of its stress tests on U.S. banks two days early. Turns out American banks are in a much better position financially than we thought.

In fact, if it were 2008 all over again, they’d do a lot better this time around. Our New York bureau chief Heidi Moore is here. Hey Heidi.

Heidi Moore: Hey Kai.

Ryssdal: So this is the financial equivalent of putting them on the treadmill, right?

Moore: Yes, exactly. They wanted to see how strong these banks were, checking whether they’re healthy, whether they’re ready to put on their big boy pants and be real banks again — and more importantly, whether they could survive another Lehman Brothers.

Ryssdal: Was it that explicit — survive another Lehman Brothers? Because nobody likes to talk about that stuff.

Moore: Yeah, it’s referred to as the recent unpleasantness, I’m sure. The Fed didn’t use the words “Lehman Brothers,” but they did describe a trading shock scenario where a major financial institution would fall apart between June and December 2008. So, you can guess. And it only tested the six biggest banks on that — you know, Goldman, Bank of America, Citigroup, Wells Fargo, JPMorgan and Morgan Stanley — and they all passed. Citigroup, however, was the weakest, and it will have to raise more capital. So I guess you can say actually Citigroup didn’t pass.

Ryssdal: Yeah. When you say “pass,” is that like with a D- or with an A?

Moore: It’s hard to say because all of these are numbers that can kind of shift. But for instance, we can take two banks that did get an A — JPMorgan and Wells Fargo — and they went running with their report cards all up and down Wall Street. That’s why the Fed has to announce today.

Ryssdal: Right. And you’ll hear that JPMorgan reaped a little bit of the benefit of that. It’s a little bit, you know, ‘Hm, really? You’re doing that?’

Moore: Yeah, exactly. A lot of the bank stocks — you know, bank stocks are up 17 percent this year and they were down all of last year, so they’re looking for any optimism.

Ryssdal: Let’s get into the nitty-gritty a little bit — what did these stress tests stress, if I must?

Moore: Sure, absolutely. First they stressed the 19 biggest banks — the ones with $50 billion in assets or more — and they asked them to picture a scenario like that June to December 2008 scenario and even worse: so unemployment at 13 percent; 50 percent drop in the stock market; a housing market decline of 21 percent; and then on top of that, let’s add a European crisis. And then figure out what they would on losses on loans if people didn’t pay back their loans, and what would happen if they got sued, what would happen if their computers fell apart — all of these different factors.

Ryssdal: Riddle me this: Are these real stress tests or are they like the first batch that came out, you know, two-and-a-half, three years ago, which was really not so much of a test at all?

Moore: Right, that had that great “Saturday Night Live” joke, they went to a simple pass-pass system? This time, it is a stress test. Everyone kind of agrees on that. And what’s more — if the passage of Dodd-Frank actually happens, there’s a clause in there that says the banks will have to do this every year. So they haven’t done this since 2009, but if we see the right regulations come through, they’re going to have to be on top of it every year. And that’s going to be very real.

Ryssdal: They test themselves, or the Fed supervises?

Moore: Both: They test themselves and the Fed supervises.

Ryssdal: Well you get the best of both worlds. Heidi Moore in New York City for us. Thanks Heidi.

Moore: Thank you, Kai.

We’re here to help you navigate this changed world and economy.

Our mission at Marketplace is to raise the economic intelligence of the country. It’s a tough task, but it’s never been more important.

In the past year, we’ve seen record unemployment, stimulus bills, and reddit users influencing the stock market. Marketplace helps you understand it all, will fact-based, approachable, and unbiased reporting.

Generous support from listeners and readers is what powers our nonprofit news—and your donation today will help provide this essential service. For just $5/month, you can sustain independent journalism that keeps you and thousands of others informed.