OPINION

Stock Market Insights: America’s Large Banks take a Stress Test

By Dr. Richard L. Baker, AIF®
Executive Vice President/Wealth Advisor

No, they didn’t line up all the presidents of America’s largest banks to walk on a treadmill with a bunch of wires taped to them. Although that probably would have been more fun to watch. 

Each year since 2010 the Federal Reserve conducts a stress test on America’s largest banks in accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act. This is where they run the banks through a hypothetical doomsday scenario to see how they would fare if the economy was in shambles.  The Fed reported this year’s results on June 24, 2021.

The Federal Reserve tested the largest 23 banks in America (they had to have at least $100 billion in total assets to qualify) to evaluate how well they would hold up in a dire situation.  The stressors for the hypothetical doomsday scenario for the 2021 stress tests were: U.S. unemployment of 10.75%, real Gross domestic product (GDP) falling 4%, consumer price inflation falling to an annual rate of 1%, three-month Treasury bills falling to zero, ten-year Treasury yields falling to 0.25%, equity/stock prices dropping 55%, the U.S. market volatility (VIX index) going to 70, residential real estate prices declining 24%, and commercial real estate prices declining 40%. (Thankfully, this is hypothetical and not actually happening.) 

In this worst-case scenario, though all 23 large banks had losses, none of them failed. All of them were able to continue meeting their obligations to their account holders and creditors and were able to continue making loans. 

America’s large banks are in great shape. This is especially impressive since they just went through an actual crazy scenario during the pandemic’s difficult financial times.

Your money is in good hands and that’s one less thing to worry about. However, now I’ve got that image of those bank presidents looking like Boss Hog from Dukes of Hazard walking on a bunch of treadmills.

Have a blessed week!

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