COVID-19

The Fed says big banks have passed their COVID-era stress tests

Nancy Marshall-Genzer Jun 25, 2020
Heard on: Marketplace
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The Federal Reserve Building in Washington, D.C. The stress test the Fed created this year envisioned 10% unemployment. The current rate is 14%. Chip Somodevilla/Getty Images
COVID-19

The Fed says big banks have passed their COVID-era stress tests

Nancy Marshall-Genzer Jun 25, 2020
The Federal Reserve Building in Washington, D.C. The stress test the Fed created this year envisioned 10% unemployment. The current rate is 14%. Chip Somodevilla/Getty Images
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The Federal Reserve said Thursday that banks are “sufficiently capitalized” and have passed their stress tests. These tests look at how the nation’s biggest banks would weather tough economic times — kind of like what we’re living through right now. The Fed also said it is putting a stop to share buybacks by banks, but it will allow banks to continue paying limited dividends.

The stress tests started in 2013 after the financial crisis so the Fed could keep better tabs on the health of banks. The Fed wants to know how banks would handle a jump in unemployment or a drop in economic output.

“This was a way for the bank to do an annual checkup the way we would go to a physician,” said Danielle DiMartino Booth, a former Fed adviser who now heads Quill Intelligence. “[It’s to] see how strong the bank’s balance sheets would be under certain types of scenarios of differing levels of stress.”

Balance sheets are one of a bank’s vital signs. It’s basically a list of its assets, like loans it’s made, and liabilities, deposits from customers who expect their money to be there if they need it. The bank does the stress test under Fed supervision.

“It’s a very time-consuming process because you’ve got to figure out how every single asset and liability is likely to be affected by this scenario,” said Kathryn Dominguez, an economist at the University of Michigan.

The Fed dreams up a different scenario for each year’s stress test. It created this year’s version back in February. It imagined an unemployment rate of 10%. Then the pandemic hit the United States.

“The unemployment rate has already gone over 14%, which is 4 percentage points higher than the assumed worst point in the stress test,” said Stephen Cecchetti, an economist at the Brandeis International Business School.

And gross domestic product is expected to fall more than the Fed imagined back in February. So the Fed created an extra test, looking at how banks would weather a sluggish recovery, a double dip recession or a quick return to normal.

COVID-19 Economy FAQs

What’s the latest on the extra COVID-19 unemployment benefits?

As of now, those $600-a-week payments will stop at the end of July. For many, unemployment payments have been a lifeline, but one that is about to end, if nothing changes. The debate over whether or not to extend these benefits continues among lawmakers.

With a spike in the number of COVID-19 cases, are restaurants and bars shutting back down?

The latest jobs report shows that 4.8 million Americans went back to work in June. More than 30% of those job gains were from bars and restaurants. But those industries are in trouble again. For example, because of the steep rise in COVID-19 cases in Texas, Gov. Greg Abbott, a Republican, increased restrictions on restaurant capacities and closed bars. It’s created a logistical nightmare.

Which businesses got Paycheck Protection Program loans?

The numbers are in — well, at least in part. The federal government has released the names of companies that received loans of $150,000 or more through the Paycheck Protection Program.

Some of the companies people are surprised got loans include Kanye West’s fashion line, Yeezy, TGI Fridays and P.F. Chang’s. The companies you might not recognize, particularly some smaller businesses, were able to hire back staff or partially reopen thanks to the loans.

You can find answers to more questions on unemployment benefits and COVID-19 here.

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