The Fed to Diversify Its Banks Assessment Tools to Fail Proof-Crisis Tests

An eagle tops the U.S. Federal Reserve building's facade in Washington

Fearing repetition of the financial problems of 2011 and 2012 the Federal Reserve Bank is considering using its health check as a process by which it can prevent the buildup of excess financial risk by lending institutions.

If implemented, this new scheme by the Federal Reserve would require banks to retain billion dollars that might otherwise be returned to the shareholders. Bank executives, have complained of the rising and intrusive nature of regulations being placed on them, believe that additional regulation is not necessary to mediate risk.

The stress test process, which began back in 2009, provides a way for the Federal Reserve to gauge whether individual banks have retained enough capital that they would be able to survive economic downturns should they happen.

However, in the post-housing bubble market, the Federal Reserve has begun to consider whether using the stress test process is a further means of controlling the procedures of individual banks would not be an advantageous strategy at prevent a future economic collapse.

The next step for the Federal Reserve is to determine what sort of factors should be taken into account under the annual test and whether these factors should target certain markets, sectors, financial metrics, or identified trouble spots that exert risk on different areas of the economy.

Currently, the stress test emphasizes the amount of money retained by banks to weather economic shocks and downturns. However, the newly proposed method would permit the Federal Reserve to deal with these issues more dynamically by adjusting the criteria as needed to protect them as well as the market as a whole.

Presently, the established version of the stress test applies to the 30 largest economic institutions in the nation.  In the past, banks have been told to stop paying dividends, stock buy-back programs, and discretionary expenditures.

A sub-plot to this revamping of the stress test is the proverbial shadow cast by the failure of the sub-prime mortgage market during 2007-2008 and the fear of a return to the failures of that era.  One fear is that creating these large, unwieldy processes and institutions to oversee this market will make the banking market less adaptable and less able to adjust to downturn and other economic difficulties that may one day arise.

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