America's Top Banks Excel in Annual Stress Test Transcript

Several of the nation’s largest banks excelled in their yearly stress tests, according to the Federal Reserve. The Fed tested how 23 banks would fare in an economic downturn. Each of those banks has more than $100 billion in assets. The Fed determined they all had enough capital on hand to survive a recession or market shock. That sounds like some good news. Well, Lori Beninger joins me now for more to break it all down. She’s the president of Bank Alliance, a network of community banks. Lori was also the director of the Troubled Asset Relief Program or TARP during the Obama administration. Lori, thank you for joining us. The Fed is testing these banks on what types of economic shocks exactly?

Well, they’re looking at, in this case, this global recession scenario, so they were shocking commercial real estate, they were shocking unemployment, they were looking at home prices. They were assuming really huge movements in those three categories amongst others to see how would banks fare, how would their capital fare. And you have to remember banks were holding capital to protect against unexpected losses, unexpected risks, so if something really bad happens, how does the bank do? Can they still continue to stay afloat and continue to lend and serve their customers? And as you mentioned, the answer for these 23 banks I think was a pretty resounding yes, they’re in good shape.

Great news, again, that headline to hear that they could survive that, but as an expert like yourself, I know you really took a look at this report. Did you see anything else… See anything else rather that stood out when you really took a close look at those numbers?

Well, first of all, I think there was the sense that I’m sure so many people had of relief. It wasn’t unexpected, but it’s great to see that as we’ve been hearing for some time, our banking system is really… The fundamentals are in good shape. What was interesting to me is there was this amount of losses that we, this aggregate amount of losses we could see in the scenarios we just discussed that was well over $500 billion, which is a huge amount of losses in a relatively small, concentrated number of banks, and the system would still be okay. And that I think really shows how much excess capital the banks have right now.

(02:12)
Think about the size of some of the TARP programs, and it was really that financial crisis in 2008, 2009, that this idea for stress tests came out of, and that was what set us on this path of stress testing. The whole bank original capital purchase program was just over 700 billion, and now we’re saying banks can lose almost 550 billion and the system is still okay. I think it really shows how far we’ve come in terms of the bank capitalization, even if in this case we’re just talking about the largest banks.

And Lori, as you know, we’re just two months shy since the last three major regional banks failed. Under the current rules, those banks would not have been subject to yearly stress testing, but should the Fed reconsider those rules?

Well, I think we’ve heard a lot from the Fed recently in various reports saying they want to look about whether it makes sense to exempt some banks that are larger, these mid-sized regionals from the annual stress test as opposed to every other year. Those rules were changed just a few years ago, but I think it’s really important to point out that even if banks aren’t necessarily required to be part of this large amount of stress tests, so many of them are still doing stress tests on their own. It’s just a part of their regular risk management. That includes the regional banks and also community banks of all sizes spend a lot of time stressing their portfolios, different parts of their businesses in different ways. They want to know how they would do in these scenarios. They want to make sure that they’re there to serve their communities, so even if the regulators might not be requiring it in such a public way, I think it’s fair to assume that responsible banks of all sizes are constantly stressing their portfolios to make sure that they remain stable.

All right. Lori Beninger for us with some good news. Thank you.

Thank you.