The Federal Reserve Bank Stress Test: What is it?

These tests arose in the wake of the global financial crisis that occurred in 2008

The Federal Reserve Bank Stress Test: What is it?

Leer en español: Las pruebas de estrés de la Reserva Federal: ¿Qué son?

Last month, the Federal Reserve of the United States (Fed) published the first part of the results of the Stress Tests for which the banking sector passes annually. According to the newspaper El Economista, these tests emerged in the wake of the global financial crisis, which occurred in 2008, and were allowed by the Dodd-Frank Act whose purpose is the prevention of another crisis of this magnitude.

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The Stress Tests to which banks are subjected are divided into two parts. The first part measures the ability of banks to survive different recession scenarios in quantitative terms. This part of the test is the one that, a greater number of banks (especially larger ones that have spent years dedicating themselves to the strengthening of their balance sheets), usually overcome without any inconvenience. For instance, this year "the 35 entities submitted to the annual test approved the exam [its first part], including the US subsidiaries of Santander and BBVA," says the newspaper El País.

The second part evaluates the qualitative processes of the banks, for example, their internal organization. It is this moment of the test that is usually more difficult for the big banks to overcome, the newspaper El Economista states that "for the first time, last year all the major banks operating in the United States, including Santander and Deutsche Bank, passed through the test." However, this year Deutsche Bank was the only bank that failed to pass the test, apparently because of an excess at the time of granting mortgages.

Nonetheless, it is possible that the tests this year were the last to work as we know them, since it is expected that soon these tests make important changes in its structure. This is because, recently, The United States Congress approved a rule in which the threshold of assets required to be placed under the supervision of the Fed. Wich canged from $ 50,000 million to $ 250,000 million. Having so, the requirement of stress tests will be higher from next year.

In addition, other changes that are being considered by the Federal Reserve are: the possibility that stress tests begin to be analyzed publicly, this, according to El Economista, to "avoid the opacity that banks criticize". It has also been proposed to relax the liquidity requirements for firms that are not considered global, "the newspaper said. Finally, another change proposed by the Fed is the possibility of requiring that the plans of the banks in case of collapse, also known as vital testaments, begin to be made every two years.

LatinAmerican Post | Sofía Carreño
Copy Edited by Laura Viviana Guevara Muñoz

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