WASHINGTON, D.C.— Dennis Kelleher, Co-founder, President and CEO, issued the following statement on the Federal Reserve’s (Fed) release of the 2024 Dodd-Frank Act stress test results:

“Stress tests for the largest, most complex, and dangerous banks are supposed to provide the public with confidence that those banks are strong enough to withstand financial and economic stress without collapsing, causing a crisis, and needing taxpayer funded bailouts. Given the unexpected and costly banking crisis and bailouts in 2023, when three of the largest bank failures in history happened, you would think that the stress tests this year would be particularly stressful.

“Unfortunately, the Fed has weakened these tests since 2017 to the point that they are not stressful enough. 100% of banks not just passing the stress tests, but ‘sailing through’ them is a clear indication that the tests are too weak and likely provide false comfort, lulling policymakers, regulators, and banks into a false sense of security. While the American people can take comfort in the results as they relate to a predictable ‘severe recession’ triggered by known historical drivers, banking stress, failures, and crises are almost always not as predicted and, therefore, such test results are likely of limited value.

“The risks to the American people from that false comfort and security are made much worse by the transformation of stress tests into capital ejection mechanisms. That’s because banks now use a stress test ‘passing’ grade to justify ejecting hundreds of billions of dollars in the form of share buybacks and dividend payouts. Thus, while the stress test results establish the so-called ‘minimum capital levels’ banks are required to have, those ‘minimum’ levels are now the maximum capital levels at the banks. Protecting the American people with minimum levels of capital is an extremely high-risk proposition, if not irresponsible, especially when it is based on the impossible premise of regulators guessing how a severely stressed scenario will play out in the future.

“The last thing these megabanks should be doing is reducing their capital levels or running their banks at minimum levels. The only thing standing between a failing bank, a financial crisis, a taxpayer bailout, and economic and human catastrophe is bank capital. If a bank has enough capital to absorb its own losses, then it won’t fail, cause a crisis, or require a bailout. Determining how much capital is enough is an extremely imprecise exercise, which is why the largest banks that pose the gravest danger to the country should be required to have much, much more than minimum levels. That is particularly important given the punishing costs the American people suffer from bank-caused financial crashes and bailouts.

“The failures of multiple large banks in 2023 illustrate the unacceptable and unknown risks that remain in the banking system and that undercapitalized banks bring severe risks and consequences. The bailouts of Silicon Valley Bank, Signature Bank, and First Republic Bank cost $40 billion because these three banks did not have enough capital. Worse, the stress testing process was blind to this risk, primarily because of deregulatory changes and unwarranted assumptions.

“The bottom line is that the Fed’s stress tests should be strengthened, the deregulation that happened starting in 2017 should be reversed, and all large banks should be required to undergo genuinely stressful tests. Thereafter, they should be required to have more than enough capital to ensure that they will not fail, cause a crash, and result in Americans paying to bail them out – again.”

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Better Markets is a non-profit, non-partisan, and independent organization founded 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.