|The Federal Reserve completed its annual stress test of 30 big U.S. banks, and released the results last week. Of the 30 U.S. banks that were tested, 29 passed, including Bank of America, JPMorgan and Citigroup.
These bank stress tests are part of the Federal Reserve’s role to act as a bank regulator for U.S. financial institutions. The Fed puts big banks — those with more than $50 billion in assets — through these stress tests is “to ensure that financial institutions have robust capital planning processes and adequate capital,” according to an official statement.
About the Federal Reserve’s Stress Test for Banks
The Federal Reserve began administering the stress test in 2009, following the government bailouts of several financial institutions, from huge mortgage lenders Fannie Mae and Freddie Mac to smaller community banks.
The test puts banks up against a hypothetical scenario of “extremely severe economic downturn” based on 28 variables, which include a U.S. unemployment rate of 11.25 percent, a 50 percent drop in equity values, and a fall in GDP and the U.S. dollar’s value, according to Forbes.
What the Fed Stress Test Means for Consumers
The fact that 97 percent of the banks tested passed the Federal Reserve’s stress test is a good sign for consumers. Here’s three reasons why:
1. Robust banks means consumers are better protected from financial crises.
The positive results of the stress test show that “the largest banking institutions in the United States are collectively better positioned to continue to lend to households and businesses and to meet their financial commitments in an extremely severe economic downturn than they were five years ago,” according to the Federal Reserve.
Should the U.S. encounter another recession, banks are better situated to weather the financial storm while still providing much-needed services and capital to their customers.
2. Investors can confidently put their money in big banks.
The stress test helps big banks prove to investors their ability to weather the downs of the financial sector. This can increase investor confidence and make their institution an attractive investment, increasing its value and stock prices.
3. Big bailouts are less likely to be needed in a recession — potentially saving taxpayers money.
The stress test shows that overall, U.S. banks would not fail under severe economic stress. While some stimulus money might be called for to assist ailing banks in a distressed economy, the need for bailouts would shrink, meaning taxpayers won’t end up footing the bill.