The Fed Says Big Banks Have Passed Their COVID-Era Stress Tests

The Federal Reserve said Thursday that banks are “sufficiently capitalized” and have passed their stress tests. These tests look at how the nation’s biggest banks would weather tough economic times – kind of like what we’re living through right now. The Fed also said it is putting a stop to share buybacks by banks, but it will allow banks to continue paying limited dividends.

The stress tests started in 2013 after the financial crisis so the Fed could keep better tabs on the health of banks. The Fed wants to know how banks would handle a jump in unemployment or a drop in economic output.

“This was a way for the bank to do an annual checkup the way we would go to a physician,” said Danielle DiMartino Booth, a former Fed adviser who now heads Quill Intelligence. “[It’s to] see how strong the bank’s balance sheets would be under certain types of scenarios of differing levels of stress.”

Balance sheets are one of a bank’s vital signs. It’s basically a list of its assets, like loans it’s made, and liabilities, deposits from customers who expect their money to be there if they need it. The bank does the stress test under Fed supervision.

“It’s a very time-consuming process because you’ve got to figure out how every single asset and liability is likely to be affected by this scenario,” said Kathryn Dominguez, an economist at the University of Michigan.

The Fed dreams up a different scenario for each year’s stress test. It created this year’s version back in February. It imagined an unemployment rate of 10%. Then the pandemic hit the United States.

“The unemployment rate has already gone over 14%, which is 4 percentage points higher than the assumed worst point in the stress test,” said Stephen Cecchetti, an economist at the Brandeis International Business School.

And gross domestic product is expected to fall more than the Fed imagined back in February. So the Fed created an extra test, looking at how banks would weather a sluggish recovery, a double dip recession or a quick return to normal.

COVID-19 Economy FAQs

Will the federal government extend the extra COVID-19 unemployment benefits?

It’s still unclear. Congress and President Donald Trump are deciding whether to extend the extra $600 a week in unemployment benefits workers are getting because of the pandemic. Labor Secretary Eugene Scalia believes the program should not be extended, and White House economic adviser Larry Kudlow said the additional money is disincentivizing some workers from returning to their jobs. Democrats want to keep providing the money until January.

As states lift restrictions, are people going back to stores and restaurants?

States have relaxed their restrictions, and many of us have relaxed, too. Some people have started to make exceptions for visiting restaurants, if only for outdoor dining. Some are only going to places they trust are being extra cautious. But no one we’ve talked to has really gone back to normal. People just aren’t quite there yet.

Will surges in COVID-19 cases mean a return to lockdowns?

In many areas where businesses are reopening, cases of COVID-19 are trending upwards, causing some to ask if the lockdowns were lifted too soon, and if residents and businesses might have to go through it all again. So, how likely is another lockdown, of some sort? The answer depends on who you ask. Many local officials are now bullish about keeping businesses open to salvage their economies. Health experts, though, are concerned.

You can find answers to more questions here.

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