Stress tests for banks aren’t designed for a downturn as severe as this one
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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 But in the middle of a real crisis, the Fed’s theoretical one is just a little outdated.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
How many people are flying? Has traveled picked up?
Flying is starting to recover to levels the airline industry hasn’t seen in months. The Transportation Security Administration announced on Oct. 19 that it’s screened more than 1 million passengers on a single day — its highest number since March 17. The TSA also screened more than 6 million passengers last week, its highest weekly volume since the start of the COVID-19 pandemic. While travel is improving, the TSA announcement comes amid warnings that the U.S. is in the third wave of the coronavirus. There are now more than 8 million cases in the country, with more than 219,000 deaths.
How are Americans feeling about their finances?
Nearly half of all Americans would have trouble paying for an unexpected $250 bill and a third of Americans have less income than before the pandemic, according to the latest results of our Marketplace-Edison Poll. Also, 6 in 10 Americans think that race has at least some impact on an individual’s long-term financial situation, but Black respondents are much more likely to think that race has a big impact on a person’s long-term financial situation than white or Hispanic/Latinx respondents.
Find the rest of the poll results here, which cover how Americans have been faring financially about six months into the pandemic, race and equity within the workplace and some of the key issues Trump and Biden supporters are concerned about.
What’s going to happen to retailers, especially with the holiday shopping season approaching?
A report out recently from the accounting consultancy BDO USA said 29 big retailers filed for bankruptcy protection through August. And if bankruptcies continue at that pace, the number could rival the bankruptcies of 2010, after the Great Recession. For retailers, the last three months of this year will be even more critical than usual for their survival as they look for some hope around the holidays.
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