Fed to Test U.S. Banks Over Europe Crisis

[Roland99]

Source: New York Times

The Federal Reserve said Tuesday it plans to stress test six large American banks against a hypothetical market shock, including a deterioration of the European debt crisis.

The Fed said it will publish the results next year of the tests for six banks with large trading operations. Those banks are Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo.

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 “additional stresses related to the ongoing situation in Europe.”

The heightened stress test for those six banks are part of a larger supervisory test the Fed will conduct on 19 firms’ capital plans.

Read more: http://www.nytimes.com/2011/11/23/business/fed-to-test-us-banks-over-europe-crisis.html

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Index futures drop on the news.

[xchrom]

1. Damn. That should be interesting. Nt

[dipsydoodle]

2. publish the results next year

due to the urgency of the matter. :sarcasm:

[freshwest]

3. Exactly what kind of 'test' are they talking about? Longer bank holidays? Computer modeling? WTH?

[Roland99]

4. more info >>>>

http://www.ft.com/intl/cms/s/0/cb93dab6-1544-11e1-b9b8-00144feabdc0.html#axzz1eRlkSZON

The Federal Reserve will force the biggest US banks to “stress test” their balance sheets against a severe eurozone recession and a US unemployment rate of 13 per cent as part of a wide-ranging exercise launched on Tuesday.

The second annual “comprehensive capital analysis and review” is designed to ensure that US banks are adequately capitalised to weather an economic storm at home and abroad, including a peak decline of 6.9 per cent in eurozone real gross domestic product. The Fed emphasised the scenarios were “not forecasts”.

...

Banks that do poorly on the exercise – which also judges their capital planning and risk management – will be prevented from paying out increased dividends or share buy-backs. BofA’s capital plan was rejected this year. The Fed said that even healthy banks which propose dividends of more than 30 per cent of net income would “receive particularly close scrutiny”.

They have to show that their core “tier one common” equity remains above 5 per cent even under the stress scenario. The Fed has not ruled out forcing banks to raise capital if they fall short in the tests, which have to be completed by January. Results will be published in March.