On March 20, 2014, 29 banks out 30 passed the Fed Stress results.While one bank was below par the rest seemed to have scored well. The real picture will be completed on March 26th,2014. Many raise questions on the stress test of banks. This article focuses on the basic key points of what bank stress results are and what are considered its drawbacks.

1. Fed’s Stress tests for Banks – 29 Pass 1 Fail
POSTED BY DEENAZAIDI ⋅ MARCH 20, 2014⋅ LEAVE A COMMENT
FILED UNDER BANKS, COMPREHENSIVE CAPITAL ANALYSIS & REVIEW, CRISES, DODD-FRANK ACT STRESS
TEST, FEDERAL RESERVE, STRESS RESULTS, TOO BIG TO FAIL, US
On March 20, 2014, Federal Reserve announced that 29 out of 30 major banks
met the minimum hurdle in its annual health check. Zions Bancorp fell below a 5
percent ratio for Tier-1 common equity to total assets weighted for risk, according
to data released by the central bank.
So what exactly are stress tests for banks?
Stress tests are analyzed on the basis of given unfavorable economic scenarios
so as to check the capital strength of banks. They help in the detection of any
weak spots at an early stage of banking.Banks are tested for different type of
risks like: Credit Risk, Market Risk & liquidity risk. The terminology gained a lot of
importance in 2009 when the US financial system was crumbling down.
The annual stress test is one of
the Federal Reserve’s most important tools to gauge the resiliency of the
financial sector and to help ensure that the largest firms have strong capital
positions,” Federal Reserve Governor Daniel K. Tarullo said.
How are the tests conducted?
The results are in two phases.The first of two tests for banks is Dodd-Frank Act
stress test (DFAST). This measures how banks hold up under hypothetical
economic conditions. DFAST tests whether banks have sufficient capital to

2. absorb losses and support operations during adverse economic conditions (like
real estate crash, unemployment increase, GDP drop, stock market crashes)
while using a standardized set of capital action assumptions.
The second and last test is on on March 26, with results from the arguably more
important Comprehensive Capital Analysis & Review (CCAR). Under CCAR, a
bank submits its proposed capital plan for the next four quarters (dividend hikes,
share buybacks), and the Fed assesses whether that bank would be able to meet
required capital ratios under with the proposed action plan with shaky economic
conditions. If they are in healthy financial conditions, then they can make their
capital plans public.
Which banks are put to test?
The nation’s biggest
banks including Bank of America, Citigroup, JPMorgan Chase, Wells Fargo,
Goldman Sachs and Morgan Stanley will be put to the test.The 30 banks were
also tested on how well they would withstand severe downturns in Europe and in
Asian countries like China and Japan.
Most of the 30 banks tested, along with hundreds of others, received federal
bailouts during the financial crisis. The banking industry has been recovering
steadily since then, with overall profits rising and banks starting to lend more
freely. The banks have mostly repaid the taxpayer bailouts.Together, the 30

3. banks accounted for about 80 percent of total banking assets in the United
States, the Fed said.
Though many argue that the stress are too easy and hence raises questions on
the grading system of the test. Many issues like the effects of credit freeze and
contagion are not considered. Hence, if the situation that is put forth by the
Federal Reserve is not too close to the real scenarios or the minimal requirement
to pass is too low, then the purpose of the whole test fails. However, this also
becomes important because making too many banks fail and that too big banks
can raise an alarm in the market and trigger a crisis on its own. Besides, doing so
can also raise big questions on one of the most popular theories on the banking
system: Too Big To Fail.
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