Big banks pass Federal Reserve stress tests

Gregory Warner Mar 14, 2012

David Brancaccio: Major stocks indexes today have been holding onto Tuesday’s gains, when prices notched up — the biggest rise of the year so far. An healing U.S. economy was the back drop but the spark was that Federal Reserve report card, if you want to call it that. The results of subjecting banks to simulated financial stress.

Marketplace’s Gregory Warner explains.

Gregory Warner: The Federal Reserve put banks through a kind of emergency drill. To see if they could still lend money in another huge recession. Remember folks: this is just a test.

Anthony Sanders: 13 percent unemployment, 50 percent drop in stock market, and 21 percent further decline in house prices.

Are you stressed yet?

Anthony Sanders is professor of finance at George Mason University’s Mercatus Center. He says if this had been an actual emergency, 15 of the 19 biggest banks would have had enough cash on hand to weather the storm.

Banks did a lot better than in 2009 when the Fed ran a stress test and banks fell short, by $75 billion.

But Lawrence Baxter a professor of bank regulation law at Duke University says this hypothetical wasn’t nearly as stressful as a real crisis where a bank fails.

Lawrence Baxter: Absolutely. Or even the concern that another bank might be failing. Because then each of the other ones will take defensive measures which includes restricting and calling in credit, and that creates the cascading failure effect.

A cascading failure that puts even “healthy banks” on life support.

I’m Gregory Warner for Marketplace.

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