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Fed to stress-test 6 big banks
Source: Agencies |
November 24, 2011, Thursday
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THE US Federal Reserve plans to stress-test six large American banks against a hypothetical market shock, including a deepening of the European debt crisis, as part of an annual review of bank health.
The Fed has said the results of the tests on six banks with large trading operations - Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo - will be published next year.
Nancy Bush, a bank analyst and contributing editor at SNL Financial, said: "They are clearly worried about the issue of Europe. In a time of risk aversion and concern, you need transparency."
The Fed said its global market shock test for those banks will be generally based on price and rate movements that occurred in the second half of 2008, and also on "potential sharp market price movements in European sovereign and financial sectors."
In the Fed's hypothetical stress scenario, unemployment would run as high as 13 percent while US gross domestic product would fall by as much as 8 percent.
The heightened stress tests are part of a larger supervisory test the Fed will conduct on the capital plans of 31 firms with at least US$50 billion in assets. The tests will apply to 19 banks that have previously been through the process and 12 more financial firms considered less complex. The test each bank faces will be based on its size and complexity.
The banks must submit their capital plans to the Fed by January 9. The Fed said it plans to respond to banks by March 15. It is not clear when the results will be published.
The Fed will use the tests to determine whether banks are robust enough to raise dividends or repurchase stock, or whether they need to obtain additional capital. It plans to release more information than it did last year about the test results. The regulator said it is doing so to "foster market discipline."
The Fed will disclose the estimate of revenues, losses and capital ratios of the 19 biggest banks as if they had suffered a market shock.
This type of disclosure could give investors and markets more certainty about the strength of US banks at a time when there are deep concerns about their European counterparts.
Matt McCormick, portfolio manager at Bahl & Gaynor investment counsel in Cincinnati, said: "Eventually this will be viewed as a positive, and a lot of people will focus on this as a way to verify the viability of these companies."
Fitch Ratings earlier this month expressed concern that US banks could take a hit from the debt crisis in Europe.
The Fed has said the results of the tests on six banks with large trading operations - Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo - will be published next year.
Nancy Bush, a bank analyst and contributing editor at SNL Financial, said: "They are clearly worried about the issue of Europe. In a time of risk aversion and concern, you need transparency."
The Fed said its global market shock test for those banks will be generally based on price and rate movements that occurred in the second half of 2008, and also on "potential sharp market price movements in European sovereign and financial sectors."
In the Fed's hypothetical stress scenario, unemployment would run as high as 13 percent while US gross domestic product would fall by as much as 8 percent.
The heightened stress tests are part of a larger supervisory test the Fed will conduct on the capital plans of 31 firms with at least US$50 billion in assets. The tests will apply to 19 banks that have previously been through the process and 12 more financial firms considered less complex. The test each bank faces will be based on its size and complexity.
The banks must submit their capital plans to the Fed by January 9. The Fed said it plans to respond to banks by March 15. It is not clear when the results will be published.
The Fed will use the tests to determine whether banks are robust enough to raise dividends or repurchase stock, or whether they need to obtain additional capital. It plans to release more information than it did last year about the test results. The regulator said it is doing so to "foster market discipline."
The Fed will disclose the estimate of revenues, losses and capital ratios of the 19 biggest banks as if they had suffered a market shock.
This type of disclosure could give investors and markets more certainty about the strength of US banks at a time when there are deep concerns about their European counterparts.
Matt McCormick, portfolio manager at Bahl & Gaynor investment counsel in Cincinnati, said: "Eventually this will be viewed as a positive, and a lot of people will focus on this as a way to verify the viability of these companies."
Fitch Ratings earlier this month expressed concern that US banks could take a hit from the debt crisis in Europe.
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