Posts Tagged ‘stress test’

Ever see a headline saying Unemployment rising to 11%

Posted: February 17, 2011 in Financial - Federal Reserve, Politics - Federal Reserve, Politics - Unemployment
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Watch what people do, don’t listen to what they say.That’s always been our mantra at NewsUnwrapped (NU) and frankly our passion behind telling the story, behind the story. So lets buckle up for this bombshell:
  • Why would the Federal Reserve force US banks to undergo another stress test?
  • Aren’t the large banks massively overcapitalized (as per the mainstream spin)?
  • Wasn’t that the whole point of the first stress test back in 2009?
From Bloomberg:
The Federal Reserve ordered the 19 largest U.S. banks to test their capital levels against a scenario of renewed recession with unemployment rising above 11 percent, said two people with knowledge of the review.The banks stress-tested the performance of their loans, securities, earnings, and capital against at least three possible economic outcomes as part of a broader capital-planning exercise. The banks, including some seeking to increase dividends cut during the financial crisis, submitted their plans last month. The Fed will finish its review in March.

“They’re essentially saying, ‘Before you start returning capital to shareholders, let’s make sure banks’ capital bases are strong enough to withstand a double-dip scenario,’ ” said Jonathan Hatcher, a credit strategist specializing in banks at New York-based Jefferies Group Inc. Regulators don’t want to see banks “come crawling back for help later,” he said.

The Fed’s adverse economic scenario included a 1.5 percent decline in gross domestic product from the fourth quarter of last year through the end of 2011, said the people, who declined to be named because the Fed hasn’t made the details of the review public. The scenario assumed growth resumes, with output rising 4 percent over the fourth-quarter 2010 level by the end of 2013. Unemployment would peak at more than 11 percent by the first quarter of 2012 and drop back to 9.5 percent by the end of 2013.

One could certain argue that this request is “just” a stress test — in the Feds zeal to be overly cautious, and protect the people. Isn’t that their function? We’d be angry if they didn’t aggressively test these banks, right. The other point of view, however, is that the Fed doesn’t ask for this type of analysis unless they are expecting something to backfire.

Either way it’s critical information, if you’re interested in where the economy is going …. What’s your take?