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Fed ready for next set of “stress tests”

Janet YellenThe Federal Reserve will conduct a new round of stress tests on 19 of the largest U.S. banks this month in order to ensure they can hold up against another financial crisis.

The large banks, including JPMorgan Chase, Bank of America, Wells Fargo and Citigroup, must provide detailed confidential data from their balance sheets as well as a "rigorous assessment of how their financial conditions would evolve over a multiyear period if economic and financial conditions were to deteriorate,” Janet Yellen, the vice chair of the Fed, said, ECreditDaily.com reports.

This is the fourth round of tests since the government bailed out Wall Street in 2008. The first set of tests were conducted in 2009, another round in late 2010 and the third earlier this year.

Next year, the Fed will begin testing an even larger number of financial institutions that are considered to be systemically important by the Financial Stability Oversight Council, as required by the Dodd-Frank law.

“Stress tests may evolve into an effective way to identify linkages across systemically important institutions that could lead them to fall into financial distress at the same time,” Yellen said, according to ECreditDaily.com.

Dodd-Frank gave the Fed the power to prevent another financial crisis though “tougher prudential standards, including enhanced risk-based capital and leverage requirements, liquidity requirements, an early remediation regime, and restrictions on activities,” Yellen said, ECreditDaily.com reports.
 

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