The Stress Test is usually a good barometer of a banks fortitude, but with the Pandemic much is unclear.

As we continue to see corporate and consumer debt defaults in the COVID-19 economic crisis, no one could clarify how the nation’s banking system will stand, according to The New York Times.

The $100,000 question is What are we preparing for?

CEO of the Financial Services Forum, Kevin Fromer, said “it’s much bigger than the $100,000 question. … we don’t have clarity.” Banks may have to slash dividends, slim down their balance sheets, or reduce lending because of the necessity to keep the unexpectedly significant amount of excess capital in their books.

The U.S. Federal Reserve, which regulates the annual bank “stress test” exams, added an extra test to measure the worsening financial conditions in recent months.

Some institutions, including the Securities Industry and Financial Markets Association, advise against that change. They stated that “unnecessarily increasing bank capital could serve to limit bank balance sheets at exactly the wrong time, likely chilling economic recovery.”

The increasing corporate and consumer debt defaults sparked by unemployment have put more stress on the banking system. JPMorgan Chase & Co, Wells Fargo & Co, Bank of America Corp, and Citigroup Inc set aside $20 billion to cover expected loan losses caused by the COVID-19 pandemic.

This year, it is not just to “catch up with what’s already happened,” said Tim Clark, a former Fed official who helped build the stress tests.

The Fed will use the stress test results alongside other capital rules to dictate banks’ overall capital level. Some analysts expected an overall less excess capital, while others said the Fed may lower requirements “given the extra-ordinary demands on balance sheets.”

Read the full story here.


Economics, Finance and Investing