The largest U.S. banks passed the Federal Reserve’s “stress test,” demonstrating their preparedness for another financial crisis and bolstering the argument for loosening financial regulations.
Thirty-four U.S. banks received a clean bill of health Wednesday when the Fed released the results of the first phase of its stress test, which is run annually to avoid a repeat of the 2008 financial crisis and the resulting federal bailout.
The report indicates that the banks have strong capital levels and could continue lending, even in the event that a severe financial crisis occurs in which unemployment rates double to more than 10 percent. While the banks passed this week’s phase of the stress test, they are not guaranteed to clear the next phase which analyzes a broader scope of “qualitative” risk management factors.
While next week’s release of phase two results may change things, the current picture looks good for President Donald Trump and GOP lawmakers who have argued that the regulations implemented after the 2008 financial collapse are no longer necessary and place an unnecessary burden on financial institutions.
“Anticipation of some form of Trump-led deregulation could not be any higher,” William Hines, an investment manager at Aberdeen Asset Management, wrote in an email to the Wall Street Journal Thursday. “The banks themselves are lobbying hard for it, and a clear bill of health from the stress tests will help their cause. But it is anything but a foregone conclusion.”
This week’s report closely follows the Treasury Department’s banking policy report which called for reductions in financial regulations. The report, released June 12, argues that no banks should have their capital plans rejected on the basis of purely “qualitative” risk management reasons.
The report also argues that banks should be subjected to the Fed’s stress test every two years rather than on an annual basis, and suggests that the Fed take public input on the hypothetical scenarios they test for and the mathematical models they employ.
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