Banks Pass Stress Tests, Could Weather Another Recession
As required under the Dodd-Frank Act, the Federal Reserve conducted its regular stress tests of major American banks and released the results late last month. Banks that hold more than $50 billion in assets are mandated to submit to a series of hypothetical tests to determine whether they retain sufficient capital to remain solvent during an economic downturn. The stress tests are part of the larger Comprehensive Capital Analysis and Review (CCAR) conducted by the Federal Reserve annually. Maintaining higher levels of capital would enable American banks to lend to consumers and businesses even as global access to capital potentially dried up.
The stress tests were touted as a crucial component of the Dodd-Frank Act following the mortgage crisis of 2008 and the near failure of many of America’s largest banks. For banks seen as “too big to fail,” the Emergency Economic Stabilization Act of 2008 infused billions of dollars back into financial institutions purported to stave off complete collapse of the American economy. The Dodd-Frank stress tests exist to ensure banks sustain the capital resources to survive future recessions and continue lending in the event of high unemployment and economic uncertainty. The Financial CHOICE Act, a comprehensive bill to overhaul the Dodd-Frank Act, proposes changes to the stress tests by making them less frequent, eliminating some mid-year requirements, and altering the amount of capital banks keep on hand. The CHOICE Act is currently being discussed in the Senate with no definitive timeframe for passage.