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What are Bank “Stress Tests”?

When you hear the words “stress test”, a treadmill, a heart monitor, and your next physical probably come to mind.  When you hear the words “stress test” in the news these days, it is actually referring to something else-tests the government is currently performing on America’s “big banks” amidst this financial crisis.

What are bank “stress tests?”

Shortly after officially taking office as President, Obama and his administration decided to perform stress tests on the nation’s struggling banks.  According to an online article published by NPR back in February, these stress tests “are a widely used method of figuring out how strong a bank’s balance sheet is – essentially using computer models based on historical data to judge how it would withstand various hypothetical situations.“  Another term used to describe the stress testing process is called “shocking” the bank’s books.

Which banks are undergoing government-imposed stress tests?

In February of 2009, the government mandated that all U.S. banks with assets of more than $100 billion would be required to undergo stress tests. This brings the grand total to 19 banks.  These tests were designed to ensure that banks could survive, and continue lending, even if the following shifts were to happen in the future:  unemployment rising to above 10 percent and home prices falling by an additional 25 percent.

Why are they being conducted?

The Treasury stated that banks will undergo these stress tests to determine whether they “have the capital necessary to continue lending and to absorb the potential losses that could result from a more severe decline in the economy than projected.” All of the 19 banks being tested are expected to pass the stress test; however, some banks will be rated higher or lower than others.

Implications of making stress test results public

The White House is still deciding whether or not they will make the results of these stress tests available to the public.  Previously, all of the banks receiving bailout money had been considered equally, preventing the more deeply wounded banks from receiving any negative attention.  The Federal Reserve even announced last week that all results must be kept confidential, as financial results like this are rarely made available to the public.  Nevertheless, some within Obama’s administration believe that results need to be released to confirm the validity of the assessments to the American people.

What if a bank fails the stress test?

As citizens affected by the credit crisis on a daily basis across various aspects of life, it is important to ask yourself what you would do if the bank you bank with failed this government-imposed stress test.  According to Treasury officials, the stress test actually “won’t be “pass or fail,” but a question of what level of capital was adequate.” Either way, these “stress tests” should have little, or no affect on the way you bank.

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Category: Banking

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One Response

  1. [...] safety net. But it was reported that because of Citi’s objections, the findings of the bank stress test will be delayed to May 7 which is three days later than the supposed announcement [...]

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