Business Monday

The Week Ahead: A less stressful time for stress tests?

Federal Reserve Chair Janet Yellen in Michigan in April. Financial reforms put in place as a result of the near collapse of the banking system during the Great Recession require the Federal Reserve to assess the ability of banks to survive tough economic times.
Federal Reserve Chair Janet Yellen in Michigan in April. Financial reforms put in place as a result of the near collapse of the banking system during the Great Recession require the Federal Reserve to assess the ability of banks to survive tough economic times. AP

For seven years America’s biggest banks have undergone financial stress tests with at least one bank failing to make the grade. That streak likely will end in the week ahead.

Financial reforms put in place as a result of the near collapse of the banking system during the Great Recession require the Federal Reserve to assess the ability of banks to survive tough economic times. The central bank tests the wherewithal of banks to withstand unemployment spiking to 10 percent, home prices falling more than 20 percent, commercial real estate dropping more than 30 percent and the Dow Jones Industrial Average plummeting 42 percent. Those are among the assumptions making up the stress test’s “severely adverse scenario.”

The results come in two phases, and the one directly impacting bank shareholders is due Wednesday. The Comprehensive Capital Analysis and Review is a bureaucratic name for the report that decides if banks can increase dividends, buyback stock or buy a competitor. It’s estimated that the banks subject to this examination have $150 billion in money waiting to be deployed assuming they get a healthy check-up from the Fed.

A buoyant financial sector has helped these 34 big banks become healthier to ride out an economic storm. But these annual report cards may become less stressful and less frequent.

A Treasury Department review of the financial system ordered by President Donald Trump recommends applying the stress tests to only the biggest of the big banks, conducting the test once every two years instead of every year, and allowing regulators to consider changes to a bank’s stock dividend or stock buyback plans even if it fails the test.

While these suggested changes may make bank stress tests less stressful, they don’t eradicate risk.

Financial journalist Tom Hudson hosts “The Sunshine Economy” on WLRN-FM in Miami. Follow him on Twitter @HudsonsView.

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