Banks To Receive Another Stress Test

Banks To Receive Another Stress Test

By David Morse

Many economic experts have backed off fears that the U.S. economy is headed for a double-dip recession, but the Federal Reserve still wants to be sure.

The Federal Reserve plans to conduct a fourth round of stress tests on banks, hoping to determine how they would fare in another recession. The vice chairman of the Fed, Janet Yellen, said the test is needed because of how the debt crisis in Europe has created vulnerability in the U.S. markets. The Dow Jones fell 3.1 percent mid-week as an unclear situation in Europe caused concern that the debt crisis overseas could affect the American economy. Then the Italian Senate approved austerity plan and in Greece a new prime minister, former European Central Bank President Lucas Papademos, was sworn in with plans to erect a national unity government. These events sent U.S. stocks skyward again, touching off two days of gains including a 260-point gain for the Dow Jones to end the week.

Other domestic signs point to a strengthening economy as well. Consumer confidence had larger-than-expected gain in November, and unemployment is close to falling below 9 percent in November, its lowest level in six months.

Since 2009, when the housing market bubble burst and sent the economy spiraling into recession, the Fed has conducted periodic stress tests on the 19 major banks it oversees, a group that includes Wells Fargo, Bank of America and JPMorgan Chase & Co. Yellen said the newest test could also become an important way to identify weak points that could send the economy back deeper into a recession. The test would be the third in close to a year, with previous tests taking place in late 2010 and early 2011. Another test was conducted in 2009.

The Fed’s previous tests were believed to help build confidence in major U.S. banks, with markets responding favorably in the past. For banks, another vote of confidence with the current test would come at an important time, when many Americans have expressed discontentment or a loss in confidence in the banks. After the Dodd-Frank financial legislation cut the amount of money banks could charge vendors who accepted debit cards, many banks introduced controversial monthly fees for debit card holders to help make up lost revenue. This was met with widespread criticism, including calls for banks to simplify their customer disclosures. The banks’ lack of clarity also created an opening for sites like CheckingAccount.com, which allows customers to compare rates and fees at different banks. The discontentment also manifesting in a Harris Interactive survey that found more than 30 percent of customers at Bank of America, JPMorgan and Wells Fargo all rated their banks fair or poor at valuing customers.