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March 26, 2014

When Is a Bank Too Small to Stress Over?

“Could the U.S. financial system really not survive the collapse of Zions Bancorporation?

“The Salt Lake City-based lender has received more than its fair share of attention, after suffering the indignity of being the only company to flunk the Federal Reserve’s latest stress tests. Much has been written about the implications for Utah’s largest bank, including a Lex column in the Financial Times that said Zions may have to raise fresh capital by selling common stock. (Heaven forbid.)

“What makes no sense is that Zions was ever deemed a systemically important financial institution in the first place. With only $56 billion of assets, it’s hard to envision any scenario in which the failure of Zions, by itself, could trigger some catastrophic chain of events in world markets. Yet there it was on the list of the 30 bank-holding companies that were subjected to this year’s stress tests.

“Zions was the smallest company on the list and the only one that failed the test, which was designed to gauge how banks would fare during a hypothetical crisis. It’s probably a good thing for the Fed that Zions was included on the list, too. If every bank that got tested had passed, there would have been no end to the snickers from critics who already perceived the exams as too easy.”

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Read full Bloomberg article here.

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