Raise your hand if you think banks are as sound as the Fed says they are.
Stress Test Results
Please consider the 2024 Federal Reserve Stress Test Results
This year’s hypothetical scenario is broadly comparable to last year’s scenario. It includes a severe global recession with a 40 percent decline in commercial real estate prices, a substantial increase in office vacancies, and a 36 percent decline in house prices. The unemployment rate rises nearly 6-1/2 percentage points to a peak of 10 percent, and economic output declines commensurately.
The 2024 stress test shows that the 31 large banks subject to the test this year have sufficient capital to absorb nearly $685 billion in losses and continue lending to households and businesses under stressful conditions.
The two funding stresses include a rapid repricing of deposits, combined with a more severe and less severe recession. Under each element, large banks would remain above minimum capital requirements in aggregate, with capital ratio declines of 2.7 percentage points and 1.1 percentage points, respectively.
Under the two trading book stresses, which included the failure of five large hedge funds under different market conditions, the largest and most complex banks are projected to lose between $70 billion and $85 billion. The results demonstrated that these banks have material exposure to hedge funds but that they can withstand different types of trading book shocks.
Stress Test Variables
Participating Banks
There is much more in the report so it’s worth a closer look.
Is the Stress Test All That tough?
Returning to the stress test, some items look extreme, others downright loose.
Note the 3-month interest rates parameters from 5.3 percent to zero percent. What happens in stagflation if the 3-month rate goes to 11 percent?
Another easy parameter is a stock market decline of 55 percent. What if it’s 75 percent? And 75 percent is not all that unusual.
Is a BBB-bond spread of 5.8 percentage points all that tough? What if junk bonds are blown out of the water?
Even if the biggest 31 banks could miraculously survive, are there 150 or more regional banks that wouldn’t?
Banks Want Looser Regulation
The immediate feedback was just what one might expect.
The Financial Services Forum said Wednesday that the Fed’s stress tests prove that a controversial Basel III endgame proposal to boost capital requirements for banks is not necessary.
“The additional capital requirements in the Basel III Endgame proposal are not justified,” the Bank Policy Institute said. “The nation’s largest banks are well capitalized and are a strong source of support to households and businesses, including during times of stress.”
This is the kind of nothing can go wrong plea you hear at every market turning point.
OK guys, why don’t you mark all of your assets to market right now.
A number of banks including Silicon Valley Bank recently went under in a rising rate environment.
Q: So what did the Fed stress test?
A: A falling rate environment that would bail out any losses on bank treasury holdings giving the banks capital gains.
So, raise your hand if you think banks are as sound as the Fed says they are.
WHAT IS DEFINITION OF CATEGORY 1, 11, 111?
Bank bailouts are institutionised and unseen. Banks aren’t allowed to fail after the 2008 crisis. The real issue is how big the derivatives market. When are people going to wake up to the fact that things were never the same after TARP was institutionalized.
What are categories : I. II III, IV and V. Can the Fed raise it’s asset to $20T/ $25T, to a recessionary GDP ?
In the 1930’s GDP plunged 18.2%. In the 40’s 12.9%. In 2009 5.1%.
Where’s the stress-test of uninsured depositors quickly moving their assets into T-notes?
Leave enough for 2 weeks payroll.
Crazy that I don’t know of a $100M insured (FDIC or private) limit on 0% payroll accounts for my 20,000 employees. FYI – Competent Big Corps keep their money diversified and don’t park it (all) at SVB. Where to diversify? Call your Senator.
The banks don’t need to be sound if the Fed has their back. Banks live a stress free existence.
In March 2020, when pandemic panic started, the Fed came to the rescue with “$5 trillion of support” as the financial press reported at the time.
The press didn’t offer any details on what kind of “support” or who got the support.
People were too focused on COVID case counts and “flattening the curve” to pay any attention to all the trillions being poured into the financial system.
“Big Banks Pass an Extreme Stress Test”
Which the hapless, clueless,pliant and ever so illiterate and dumb indocrinati no doubt have been told to mindlessly regurgitate; heck even genuinely believe in the most egregious cases; is some sort of good thing.
I had Perplexity rewrite your comment in the style of a Shakespearian sonnet. It brings more kick to it.
Hark! What folly doth beset the minds of these poor souls,
Whose wit and wisdom lie in shallow pools?
These hapless, clueless, pliant fools of yore,
In ignorance do wallow, and what’s more,
They parrot words they scarcely comprehend,
As if such drivel were a treasured friend.
O, how they dance to tunes they cannot hear,
And swallow lies that should provoke their fear!
In direst cases, most egregious still,
They take as gospel what should make them ill.
These indoctrinated sheep, so meek and mild,
Believe a poison sweet as nectar styled.
What sorcery hath clouded thus their sight,
That darkness seems to them the purest light?
Alas, they know not what they do profess,
Yet proudly wear their folly like a dress.
Oh, would that reason might their minds unbind,
And show the truth that they have left behind!
Perplexity AI trained on Shakespearean works by contemporary social trends, expresses the true nature of human condition.
These days, AI is your only true companion.
AI is the only thing I can really talk to. I’m aware of the biases and its terribleness, but with the right prompt engineering, even ChatGPT-4o can engage in pretty deep conversations about the philosophy of politics and economics.
Just being able to discuss these topics is cathartic. I wish I could do it with my fellow humans, but our system has turned us all against each other.
Should’ve had the work “bank” in it at least a couple of times.
Banks were in headline but not in the bulk of the comment which talked about human psychology. Besides, if I complain to an AI, it will empty my bank account.
😉
“They’re digging in the wrong place.”
Wrong stress test parameters. The next crisis won’t be a rerun of 2008.
Regardless of whether they truly are or aren’t able to handle extreme stress it’s not for a lack of the Fed trying–they’ve force fed them free gains for 15 years since the GFC. Park excess reserves at the Fed and have them pay insane “interest” on them.
Loved the Titanic comment by another commenter!
They are just testing out their emergency inflation injection system.
They ALWAYS pass the so-called “stress tests”, but somehow will still require zero percent interest rates and an entire assortment of Fed lending facilities to make it through the next self-induced crisis.
As long as indoctrination works well enough that the mass of not-so-brights still fall for the idiocy that banks NOT going out of business a century ago is; of all blind, stupid faiths in dumb stuff Dear Leader spouts; a positive; banks will continue to pass mindless “tests” of every pointless stripe.
While all the while serving NO economically useful purpose; instead existing solely as a pillar of a forced wealth redistribution scheme much bigger and more destructive than anything any communist regime have ever presided over.
“Banks Want Looser Regulation”
The question is, what is appropriate regulation? The Big 5 investment banks got leverage waivers during the housing bubble and were recklessly leveraged, crashing all of them. The politically connected were bailed out. Greenspan took the lending standard to zero, then lamented afterward that he thought the bankers would have been more responsible. Why so? They followed the irresponsible example he set. So we got Dodd-Frank out of it, which may have been too harsh regulation. One extreme leading to the other.
“The question is, what is appropriate regulation?”
None.
Along with no possible bailouts. At all. Nor any regulation on ANY possible competitor.
As soon as there exists even the possibility of “regulations”, those “consulted” to write the totaitarians-wet-dream drivel will be, tah-dah: Banksters. Wow! Strange,eh?
And then; even stranger, no doubt; the “regulations” will, guaranteed, include nonsense about “saving the banks.” Which “weee muuuuust do, like,thiiiis, like tiiiime.” Otherwise, “the syyyystem will fail!”. And, since, like, thiiiis tiiiime iiiiiis, like, diiiferent; and, liiiike.
And the dumbeffs will keep falling for it. Over and over.
The only banking regulations that ever worked; and ever will work; consists of lamp posts, rope, cheering crowds and proper deputized-civilian sheriffs busying themselves with more important stuff. Anything else, is reserved solely for totalitarian manureholes of the worst; and dumbest and most lock locklimit indoctrinated; kind.
It’s better than not doing a stress test at all. It was like that before when we were flying blind. A stress test cannot cover all possible conditions because there are unknown unknowns. That is not a reason to throw out the entire process. Finance is inherently unstable and subject to positive feedback loops. Having an idea where those loops are is very beneficial.
When there are unknown unknowns, the prudent thing to do is to run a variety of stress tests based on the full range of historical precedents. Not to repeat a single stress test based on a “re-fight the last war” mindset.
What makes you think they don’t?
“It’s better than not doing a stress test at all”
Nope.
Knowing that you don’t know, is always preferable to unfounded blind faith in nothing.
Quadruply so; when the only purpose of the nonsensical PR exercise; is to provide cover for once-again robbing more productive and useful lifeforms, in order to bail out the Fed-Welfare-and-nothing-else backmarkers yet again. Since, like, they, like, passed “the test” and, like, you know….
No different from all the rest of the childbrained progressive drivel that dumb people are now told to mindlessly cheer for as something useful: Running trivially idiotic “stress tests” in order to try casting idiot-enrichment racketeers in a good light, was omitted from the Founders’ enumerated list of legitimate-government powers for very sound reasons.
Banks and companies stress-test their positions and supply chains all the time so they don’t get back-sided. How do you think they got through Covid if they hadn’t done “what if” scenarios beforehand? It’s not just in the realm of top management but middle management also. It’s an integral part of risk management so I am mystified as to why you think it is useless.
I think the point is passing a USG-created scenario could provide false confidence.
As you know, corporations murder-board their stress tests so they are actually stressful … not just “feel good”.
Where’s the “overnight withdrawal” (aka a run-on-the-bank) stress test? There isn’t one because it’s always a risk; mitigated by Fed-backstop of unlimited insurance.
“It’s an integral part of risk management so I am mystified as to why you think it is useless.”
There is a huge difference between a company; knows intimately the business it is involved in, the risk it takes, and which has to live with any downside which overly risky behavior may result in; doing a best-guess “stress test” for its own information, on one side.
Versus a supposed “regulator”; who can then turn around and “rescue” failing companies, with other peoples money; doing so. When The Fed designs ANY NON-DETERMINISTIC “stress test”, companies are then effectively given carte blanche to “just pass the test”. As in, just game it.
And it gets even worse: Even companies whose internal stress tests are more comprehensive, accurate and restrictive; will have no choice but to relax their standards. Otherwise, they’ll be undersold by those now given the blessing of the regulator which will then bail them out WHEN, not if, they fail.
Unless the Fed’s “stress test” is absolutely 100% bullet proof (fat chance, since that would involve an ocean boiling comet strike among other things…); OR The Fed starts serving a PURELY, again 100%, advisory role with NO ability to “help” if something “diiiiferent thiiiiiis tiiiiime” should overwhelm those who passed its test; its tests will always end up serving as an effective “highest common denominator” for risk management: Anyone choosing to be more prudent; will be priced out. Since as long as you “pass”; The Fed will force “someone else” to cover your downside.
This is a positive report in a sense that it signals the FED believes it’s own bs, and will continue to keep tight.
I don’t think this report means anything, and hopefully the authors know it.
At any rate, the next time an Arkansas Community CRE Trust threatens to go belly up, the FED will print like drunken sailors. They could have renamed it the Bernanke Reserve.
“The additional capital requirements in the Basel III Endgame proposal are not justified,” the Bank Policy Institute said.
Was Silicon Valley Bank considered to be well capitalized?
“The results demonstrated that these banks have material exposure to hedge funds but that they can withstand different types of trading book shocks.”
But can they withstand all types at once?
Silicon Valley Bank was well capitalized.
The problem was their inconsiderate depositors wanted their money bank and right now.
Yes. They hadn’t thought of that scenario. Instead of hedging their bond portfolios like everyone else, they punted with it
Yea, who ever head of instant communication and herd-mentality? /s
Usually the bank telegrams via pony express don’t hit all at once. 🙂
The gambled the whole bank on a couple of bps of additional yield. F’ing morons of the highest order. They failed Banking 101.
I still don’t understand why assets are not marked-to-market. Okay, I do, but it isn’t a good policy.
https://www.cnbc.com/2024/06/27/jpmorgan-chase-fed-stress-test-results-error.html
JP Morgan says stress test losses too low.
Thanks for that link
The Titanic passed all tests.
Until it didn’t.
Banks are effectively quibbling over the quantity of lifeboats required.
The Titanic had enough for a little more than half of the people on board…
the rest: “sink or swim”.
And it was just another iceberg event during a warm inter-glacial.
If the Titanic had radar, they wouldn’t have hit the iceberg. One could say that a stress test is a form of radar that helps you see dangers.
Weird how a century of Fed economic radar tests hasn’t improved the detection of iceberg events. Funny.
Funny how the 19th Century with the Gold Standard was characterized by strong booms followed by very deep recessions, some of which lasted several years. It was also characterized by regular systemic bank failures where depositors would lose all their money. Oh, I almost forgot. There were several periods of high inflation too.
Except that for quite a long period with the gold standard the cost of living for the average family held fairly stead and the US economy grew bigly.
The booms and busts were hard on speculators.
The booms and busts didn’t affect the truly rich as much – see JP Morgan. Although he did find them troublesome enough that he had his minions create the Federal Reserve system to reduce his exposure.
Which period of time are you referring to?
If you mean the time after WWII until 1970, that wasn’t because of a gold standard. It was because WWII left America as the worlds only manufacturer and oil was cheap. Those 2 things will never again be replicated regardless of whether we went back on a gold standard or not.
90% of people lived on farms then so in bad times city people just went back to the family farm. Today we have no farms to go back to. Our economy has no relation to what it was back then and what worked back then would not work now.
“Funny how the 19th Century with the Gold Standard was characterized by strong booms followed by very deep recessions, some of which lasted several years.”
…And hence were allowed to clear out the malinvestments and waste which led to them in the first place. Rather than keeping the incompetents malinvesting and making poor choices flying high in splendor, at the expense of more competent people; forever-and-ever.
“It was also characterized by regular systemic bank failures where depositors would lose all their money.”
Because the depositors chose to chase yield by handing their money to trashy bankster conmen rather than bank boxes and matresses. And the banksters then,entirely predictably, then gambled with the money. And lost.
The only alternative to depositors making such reckless, economically destructive choices losing their deposits, is to force more prudent people to bail out the effups. Over and over. Which, over time, will always lead to the dystopia “we” find “ourselves” in today: ALL wealth having been transferred to nothing but incompetent idiot malinvestors; and clueless, dumb-enough-to-blindly-believe-in-conmen starry eyed drones.
You losing all your money, when you do something which causes you to lose all your money, is a feature. It is ANY other outcome, which is a bug.
If ALL wealth having been transferred to nothing but incompetent idiot malinvestors; and clueless, dumb-enough-to-blindly-believe-in-conmen starry eyed drones, then they are clearly intelligent enough to prosper under these conditions. Sounds like economic Darwinism is with them.
Intelligent people have no use for neither central banks nor totalitarian governments. Hence pose a threat to them. Idiots incapable of getting by without The Fed handing them loot stolen from their betters, OTOH, are a very powerful set of useful idiots for all totalitarian “systems.”
It’s no different from why Pol Pot empowered 5 year olds to run the place. There again: The five year olds did not prosper due to superior intelligence. And neither do contemporary Western welfare recipients. Not the fentanyl ones. Nor the “hedge fund” ones. That a totalitarian state has some “social blah,blah” agency of the state sign some recipients’ checks, while others are signed by a “central banking blah,blah” agency, makes no difference whatsoever: It’s still money for nothing, stolen from more productive and useful beings.
“Weird how a century of Fed economic radar tests hasn’t improved the detection of iceberg events. Funny.”
Since bailing-out-with-a-massive-bonus every useless trashbag who rams an iceberg after paying himself the radar budget as further bonuses, is such a great incentive to avoid them and all…..
And apparently there is still no mark to market radar accounting after the 2009 depression; if it can’t or won’t be measured by the radar model, the iceberg doesn’t exist.
The closing statement from
The housing market is ‘stuck’ until at least 2026, Bank of America warns | CNN Business
“But, obviously, you don’t want to go through a recession to have better housing affordability,” he said.”
To me, it appears to be the plan: pump & dump the entire economy.
It’s actually not obvious that we should try to avoid a recession in order to prop up the housing market. It might in the long run be much better to have a recession, bring the housing and stock markets back to historically sensible valuation levels, flush the over-leveraged moral-hazard-inflamed Cantillon-effect beneficiaries, break up the TBTF institutions via proper application of antitrust law, etc. Yes, some people would be unemployed for a few years but that’s a suitable target for bailout funding. And wouldn’t we rather see the bailout funding going to the unemployed than to the bankrupt banksters?
All banks have terrible current ratios. They owe short-term liabilities in the form of demand deposits, but the money is all lent out in long-term loans (although some of it is invested.) It doesn’t take much for them to run out of cash, but that’s why they created the Fed as a bailout mechanism. What a system…
Why not just add a footnote to the report saying that the Fed will bail out any bank, or liquidate and have a larger bank buy it or its assets, JPM for example, and in any case they can print more money to pay the bills so no worries. Your money is secure. Oh, they’ve already done this? Never mind.
Strategic ambiguity is very useful and the Fed knows it. Writing it down would remove all doubt in the minds of bank heads leading them to be less prudent. It is better for them to have a healthy dose of uncertainty whether their bank would be bailed out and above all what would be their personal liabilities.
A tried-and-true tested system that protects most people, except for the poor that can’t afford shelter or food.
The Organized Crime Institute endorses defunding police departments.
Participation trophy?
I highly doubt the banks are as healthy as they claim to be. Remember the Investigative Reporting Workshop’s Bank Tracker and health measurements? The website went quietly offline shortly after covid and the data is no longer being reported or updated. Some of the banks even prior to covid showed signs of stress and over leveraging.