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

Are states ready to roll out COVID-19 vaccines?

Claire Hannan, executive director of the nonprofit Association of Immunization Managers, which represents state health officials, said states have been making good progress in their preparations. And we could have several vaccines pretty soon. But states still need more funding, she said. Hannan doesn’t think a lack of additional funding would hold up distribution initially, but it could cause problems down the road. “It’s really worrisome that Congress may not pass funding or that there’s information circulating saying that states don’t need additional funding,” she said.

How is the service industry dealing with the return of coronavirus restrictions?

Without another round of something like the Paycheck Protection Program, which kept a lot of businesses afloat during the pandemic’s early stages, the outlook is bleak for places like restaurants. Some in the San Francisco Bay Area, for example, only got one week of indoor dining back before cases rose and restrictions went back into effect. Restaurant owners are revamping their business models in an effort to survive while waiting to see if they’ll be able to get more aid.

How are hospitals handling the nationwide surge in COVID-19 cases?

As the pandemic surges and more medical professionals themselves are coming down with COVID, nearly 1 in 5 hospitals in the country report having a critical shortage of staff, according to data from the Department of Health and Human Services. One of the knock-on effects of staff shortages is that people who have other medical needs are being asked to wait.

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