COVID-19

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

Nancy Marshall-Genzer Jun 25, 2020
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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
Heard on:
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 do vaccines mean for economic recovery?

COVID-19 is not going anywhere anytime soon, according to expert witnesses who testified at a recent hearing held by the Joint Economic Committee. Put simply, we can’t eradicate the virus because it infects other species, and there will also be folks who choose not to get the vaccine or don’t mount an immune response, according to Dr. Céline Gounder at NYU School of Medicine & Bellevue Hospital. “That means we can’t only rely on vaccination,” Gounder said. She said the four phases of recovering from the pandemic are ending the emergency, relaxing mitigation measures, getting to herd immunity and having long-term control.

Can businesses deny you entry if you don’t have a vaccine passport?

As more Americans get vaccinated against COVID-19 and the economy begins reopening, some businesses are requiring proof of vaccination to enter their premises. The concept of a vaccine passport has raised ethical questions about data privacy and potential discrimination against the unvaccinated. However, legal experts say businesses have the right to deny entrance to those who can’t show proof.

What do I need to know about tax season this year?

Glad you asked! We have a whole separate FAQ section on that. Some quick hits: The deadline has been extended from April 15 to May 17 for individuals. Also, millions of people received unemployment benefits in 2020 — up to $10,200 of which will now be tax-free for those with an adjusted gross income of less than $150,000. And, for those who filed before the American Rescue Plan passed, simply put, you do not need to file an amended return at the moment. Find answers to the rest of your questions here.

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