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Stress tests for banks aren’t designed for a downturn as severe as this one

Justin Ho Apr 6, 2020
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JPMorgan Chase is set to report earnings tomorrow. Michael Nagle/Getty Images
COVID-19

Stress tests for banks aren’t designed for a downturn as severe as this one

Justin Ho Apr 6, 2020
JPMorgan Chase is set to report earnings tomorrow. Michael Nagle/Getty Images
HTML EMBED:
COPY

Thirty-four of the biggest banks in the U.S. are turning information over to the Federal Reserve that will allow the central bank to gauge whether those financial institutions are capable of handling a theoretical crisis.

These are the stress tests required by the Dodd-Frank reforms passed after the last financial crisis. But in the middle of a real crisis, the Fed’s theoretical one is just a little outdated.

Under the worst case scenario, the Fed imagines the economy contracting by nearly 10%, with 10% unemployment. Columbia Law School professor Kathryn Judge said today’s reality looks way worse than that.

“Also, those bad outcomes are arriving far, far more quickly than the Fed had projected the rate of decline to be,” Judge said.

How fast? Earlier today, former Fed Chair Janet Yellen said GDP could drop by 30% this quarter. And UC Irvine law professor Dave Min said that in a situation where many consumers aren’t even supposed to leave their houses, even the most prudent banker in the world would have trouble.

“At some point, the business of banking is about making loans,” Min said. “And if you’re making loans in a terrible economy like this one, you’re going to suffer.”

JPMorgan Chase has run stress tests of its own. CEO Jamie Dimon said in a letter to investors that if the economy contracts 35%, the bank would still be fine. And, probably, still able to pay dividends.

But bank advisor Mayra Rodriguez Valladares at MRV Associates said JPMorgan and other banks might want to think twice about dividends.

“Absolutely every market and macro signal is telling us that there’s rising probabilities of default for individuals and especially for companies,” Rodriguez Valladares said. “Banks need to shore up capital to sustain unexpected losses.”

The central banks of Europe and England have pressured financial institutions to stop paying dividends right now. As of now, the Fed has not.

COVID-19 Economy FAQs

So what’s up with “Zoom fatigue”?

It’s a real thing. The science backs it up — there’s new research from Stanford University. So why is it that the technology can be so draining? Jeremy Bailenson with Stanford’s Virtual Human Interaction Lab puts it this way: “It’s like being in an elevator where everyone in the elevator stopped and looked right at us for the entire elevator ride at close-up.” Bailenson said turning off self-view and shrinking down the video window can make interactions feel more natural and less emotionally taxing.

How are Americans spending their money these days?

Economists are predicting that pent-up demand for certain goods and services is going to burst out all over as more people get vaccinated. A lot of people had to drastically change their spending in the pandemic because they lost jobs or had their hours cut. But at the same time, most consumers “are still feeling secure or optimistic about their finances,” according to Candace Corlett, president of WSL Strategic Retail, which regularly surveys shoppers. A lot of people enjoy browsing in stores, especially after months of forced online shopping. And another area expecting a post-pandemic boost: travel.

What happened to all of the hazard pay essential workers were getting at the beginning of the pandemic?

Almost a year ago, when the pandemic began, essential workers were hailed as heroes. Back then, many companies gave hazard pay, an extra $2 or so per hour, for coming in to work. That quietly went away for most of them last summer. Without federal action, it’s mostly been up to local governments to create programs and mandates. They’ve helped compensate front-line workers, but they haven’t been perfect. “The solutions are small. They’re piecemeal,” said Molly Kinder at the Brookings Institution’s Metropolitan Policy Program. “You’re seeing these innovative pop-ups because we have failed overall to do something systematically.”

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