Fed announces 3rd round of bank stress tests

[November 23, 2011]  WASHINGTON (AP) -- The Federal Reserve announced on Tuesday that it will conduct a third round of stress tests to determine if major U.S. banks can withstand a downturn in the economy.

The latest round of tests comes at a time when many are concerned about U.S. banks' exposure to the European debt crisis, which could throw that region into a recession and rattle global financial markets.

Vice Chairman Janet Yellen last week said the Fed would pursue the stress tests in coming weeks.

The Fed performed the first stress tests in the spring of 2009. The country's 19 largest banks participated. The initial stress test reassured investors that America's biggest banks had the resources to get through the recession and the fallout from the 2008 financial crisis.

For the latest test, the field has been expanded to 31 banks. The financial regulatory overhaul passed last year requires banks with at least $50 billion in assets to take part.

The Fed said that the banks would be required to test their ability to withstand a recession beginning at the end of this year that would drive unemployment up to more than 13 percent by early 2013. The jobless rate now stands at about 9 percent. The central bank said the parameters of its test would reflect a sizable drop in economic activity not only in the United States but in the global economy.

Sabeth Siddique, a former assistant director of banking supervision at the Federal Reserve who is now at accounting and consulting firm Deloitte, said that the central bank has designed reasonable economic criteria to use for this year's stress test. He said in some ways the economy is facing greater hurdles than it was in 2009.

"Back in 2009, we were in a difficult environment, but the economy was looking up," he said. "Right now, unemployment and economic growth continue to be anemic and the prospects of a quick recovery over the next two years don't seem that likely."

Wall Street has pummeled bank stocks recently because concerns over U.S. banks' exposure to Europe's debt crisis. Last week, Fitch Ratings said it believes that unless Europe's debt crisis is resolved in a timely and orderly manner, the "broad outlook for U.S. banks will darken."

Siddique also said that the threats to the U.S. financial system were being exacerbated by a debt crisis in Europe where countries such as Greece are having trouble meeting payments on their debt, which is putting at risk banks, primarily in Europe, that hold that debt.

The Fed is expected to release results of the latest stress test on the top 19 banks by late March. That will be a change from the 2011 test in which firm-by-firm results were not released.

Banks have until Jan. 9 to submit the information to the Fed. They must show they have enough capital reserves to withstand projected loan losses from an economic downturn.

[Associated Press; By MARTIN CRUTSINGER]

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