Thursday, March 12, 2015
U.S. Banks Pass Stress Tests, Some With an Asterisk
Bank of America, the nation’s second-largest bank by assets afterJPMorgan Chase, passed only provisionally and could still fail later this year if it does not fix deficiencies that the Fed identified. The Fed said that Bank of America stumbled this year because it had shown weaknesses in its internal controls and in how it had projected losses and revenue in the tests. Citigroup passed this year, a result that will come as relief to its top managers, who faced criticism after the Fed failed the banking giant in 2014 for having a deficient disaster plan.JPMorgan, Goldman and Morgan Stanley had to change their plans to pay out capital to pass the tests. After the stress test results came out, Morgan Stanley announced a plan to buy back $3.1 billion of common stock. “Today’s actions reflect the hard work of our employees over the last several years as we have been executing our strategic priorities,” James P. Gorman, Morgan Stanley’s chief executive, said in a statement.
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5 comments:
As someone who has worked for, and intends to work in this industry after graduation. These restrictions imposed by the government and Fed have profound implications on the day-to-day operation of the bank. The necessity to document internal controls and policies and procedures has caused for the need for risk and compliance staff on every team. While the intent is to mitigate financial crises, it adds layers of red tape and increases the difficulty of internal transactions. I personally feel that Dodd Frank and Federal Reserve scrutiny will not prevent financial crises, and thus do not put much weight into the Fed's stress tests.
Regulations are always a response to things that happen already, not a proactive response against future problems. So I agree that the stress tests are less valuable than would be implied.
But Austin, hiring a risk and compliance staff for every team helps create jobs! Surely that's a good thing?
I understand what Austin & Emi say so does the result of this test does not have any effect on customer confidence for their own bank?
While regulation may not prevent financial crises, they may cushion their impact or decrease their regularity; through the Minsky model, virtually every economic panic is due to the deregulation (or no regulation) of credit availability coupled with a glut of credit. While, historically, firms have found a number of ways around any existing regulation, strong oversight of the financial sector will likely lessen the severity or frequency of panics, even if it does provide the superficial appearance of lessening economic growth by limiting bubbles.
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