Four large US banks would not withstand a future financial shock
Four large US banks would not withstand a future financial shock.
Four of the biggest US banks: Citigroup, Ally Financial, SunTrust and MetLife, failed in the latest round of Federal Reserve stress tests, the aim of which is to make sure that banks have enough cash to survive another financial crisis, making it less likely the government has to bail them out again.
The Federal Reserve has been conducting stress tests since 2009, but these were the first where results were made public.The good news is that at least the majority of the 19 tested, passed and all of the financial institutions are in a much stronger state than they were before and after the 2008 financial crisis.The banks with the best ratio were Bank of New York Mellon, State Street and American Express.
The Fed tested banks' ability to withstand a similar crisis that triggered a rise in unemployment to 13%, a 50% fall in share prices and a 21% drop in house prices.Their strength is assessed by the amount of "buffer" best-quality assets, known as Tier 1 capital, they would hold if such conditions occurred.
The scenario was tougher than in previous years as the Fed wants to be sure US banks will be fit enough to meet new banking rules, known as Basel III that come into force in 2014.
Banks shouldbe able not only to withstand a future crisis but to keep lending, unlike the freeze of credit in 2008, which deepened the crisis.
Nevertheless, some experts remain unconvinced about the effectiveness of these tests in preparing banks for future crises.
