Bank Stress Tests Getting an Overhaul
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What is the main topic discussed in this episode?
I'm J.R. Whalen in New York. Stress tests administered by the Federal Reserve can tell a lot about a bank's liquidity in times of crisis. We'll explain in a moment why those tests are likely to undergo significant changes. First, these money headlines. Americans view the economy with some of the highest levels of optimism in years, but their rosy outlook has dimmed as they look to the future. The director of economic indicators at the conference board says the pullback and optimism suggests that consumers do not foresee the economy gaining much momentum in the months ahead. Confidence soared starting in late 2016, but stocks have wobbled this year after rising sharply in 2017. Plus, signs of softening economic growth have appeared in Europe and Asia, and interest rates and gasoline prices have risen in the U.S.
Those are developments that could hinder consumer spending. And new research suggests that women frequently underestimate the time, money, and effort it takes to raise children and have a career at the same time, leading many to invest in their skills and then reluctantly leave the workforce when the true costs of being a working mother become apparent. Since around 1990, the study found that about 2% of 18-year-old women who participated in a University of Michigan survey of young Americans' attitudes and values said they expect to be stay-at-home mothers by the age of 30.
What are Fed bank stress tests and why were they created after the recession?
Yet 15% to 18% of American women become homemakers by age 30, suggesting that many expected to combine work and motherhood and then reversed course. This is your Money Briefing from The Wall Street Journal. Welcome back, everybody. Since the recession, one of the more closely watched days on the calendar has been the day when results of bank stress tests are released by the Federal Reserve. Wall Street Journal financial regulation reporter Ryan Tracy joins us to explain why those stress tests could soon be a relic of the past. So, Ryan, the latest batch of test results are released on June 28th. Could you just briefly explain what the stress tests are and what they measure?
The stress tests were invented after the recession as a way of examining whether banks could go through a significant downturn in the economy and continue lending, continue doing what banks do without requiring some sort of taxpayer bailout. The tests have become more and more important as they've become more and more central to the way that the Federal Reserve examined banks. So each year the Fed will reveal these results looking at how banks perform under a hypothetical scenario. scenario. And based on those results, the banks pass or fail the tests and failures can have some negative consequences for the banks. And so for bank investors and for just regular old citizens who care about this stuff, this can be a very important day.
And for the banks, for the most part, they have fared pretty well in these tests with a couple of exceptions.
Yeah, usually there's about 30, between 30 and 40 banks taking them every year. These are mostly the largest banks in the United States.
Which banks take the annual stress tests and how have results trended since 2008?
And generally, the vast majority of them pass with a couple of exceptions. And that reflects two things. One, that after the recession, banks have really built up their capital levels. So when they go through this hypothetical doomsday scenario, they do better than they maybe would have in 2007. Also, it reflects the fact that they've done a better job in the Fed's view of improving the way that they manage their risk, of improving the way that they prepare for the worst.
And under these new processes that the Fed is proposing, it would put a focus on the bank's capital levels and really do its measurements from there.
Right. So what we're looking forward to as the tests move forward is really a change in the form of the grades that the Fed issues every year. The Fed has used these tests as a stick. When Citigroup failed in 2014, it was a huge deal for that bank. The CEO's job was on the line. And it was a message from the Fed that it was unhappy with the way Citigroup was being run and wanted to see and the pace at which Citigroup was making improvements that the Fed thought the bank needed to make.
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Chapters
4 chapters
1
What is the main topic discussed in this episode?
0:00–1:25
2
What are Fed bank stress tests and why were they created after the recession?
1:25–3:07
3
Which banks take the annual stress tests and how have results trended since 2008?
3:07–6:41
4
What do the quantitative and qualitative parts of the stress tests measure?
6:41–7:12
Speakers
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