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June 23, 2022

The Federal Reserve’s Stress Tests Are Too Stress-less When All Too-Big-To-Fails Banks Always Pass, Even at a Time of Extreme Stress Like Now

WASHINGTON, D.C.—Phillip Basil, Director of Banking Policy, issued the following statement on the Federal Reserve’s release of the results of its 2022 Dodd-Frank Act stress test:

“Despite a heightened, near-unprecedented combination of simultaneous shocks and risks to the economy and the financial system — from a pandemic and war to skyrocketing inflation and speculative financial bubbles — that are lowering the living standards of most Americans, the Federal Reserve’s stress tests continue to be too stress-less.  When all too-big-to-fail banks pass comfortably year-after-year, the tests clearly don’t actually stress or test the banks.  While these results may cause some to think these tests show that the banks are sufficiently resilient and have enough capital, it is little more than false comfort misleading the American people into thinking there won’t be more taxpayer bailouts when future bank failures happen.

“The Fed has once again declared, as they do annually, that the ‘banks continue to have strong capital levels,’ but does not identify the benchmark against which such a conclusion is drawn. For example, the results of this year’s tests show the cumulative banks’ capital ratio decreasing from 12.4% to 9.7%, which is comfortably above the Fed’s regulatory minimums (which themselves are too low and lack a robust benchmark).  However, if the stronger assumptions that were used prior to Trump-era deregulatory actions were in place, the cumulative capital ratio across the banks in the stress test would have declined another 1.9 percentage points, or about $200 billion of required capital. Additionally, this capital depletion is exacerbated by other deregulatory actions that made it even easier for large banks to deplete their capital through distributions in periods of stress, something the banks repeatedly have done, and no doubt will do even in the face of future stress.

“Making the results even more troubling, the stress tests serve as the basis for setting the so-called stress capital buffers, or SCBs, which are a material portion of large bank capital requirements. Capital ratios for many large banks have declined since last year, and so meaningfully strong stress tests are critically important to ensure the biggest, most dangerous banks have sufficient capital to withstand the likely financial and economic turmoil of the coming year. Nevertheless, based on these results, it is unlikely the SCBs – which officially will be announced in the coming weeks – will be increased. The American public deserve better, and the Fed simply must do better.”

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Better Markets is a non-profit, non-partisan, and independent organization founded in the wake of the 2008 financial crisis to promote the public interest in the financial markets, support the financial reform of Wall Street and make our financial system work for all Americans again. Better Markets works with allies—including many in finance—to promote pro-market, pro-business and pro-growth policies that help build a stronger, safer financial system that protects and promotes Americans’ jobs, savings, retirements and more. To learn more, visit www.bettermarkets.org.

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