By Craig Wilson
This post There’s One Big Problem With the Fed’s Latest Stress Test appeared first on Daily Reckoning.
The Federal Reserve released its latest stress test report in June and buried within the findings were details that an alarming number of banks would lose tens of billions within the financial system yet again.
Nearly a decade since the global financial crisis that saw countless jobs, homes and savings ruined — signs show that the system is still considerably at risk.
By mandate the Fed is to be a central banking institution that encourages and sets conditions for secure banking and financial systems to exist. At its core, the central bank is meant to stabilize and grow the economy through measures such as supervising what it has labeled as banking holding companies (BHCs).
After the Dodd-Frank Act was passed in 2010, the Fed took on the responsibility to conduct stress test reports on financial firms, the select BHC’s, that maintained $50 billion plus in consolidated assets. The purpose was to see if those firms had enough money saved and whether they would be able to meet required financial levels in order to survive massive losses during stressful economic conditions.
Within its latest model, the Federal Reserve projected that an estimated 34 banks would “experience significant losses on positions and loans under the severely adverse scenario.”
The report summarized that losses could hit an estimated $493 billion across loans, credit on securities, trading and a range of other provisional outlets. In the chart below, the near half a trillion in losses would hit almost every sector in the financial industry.
[The Federal Reserve System: Dodd-Frank Act Stress Test 2017: Supervisory Stress Test Methodology and Results]
Though the major Wall Street banks may have passed the Fed’s Comprehensive Capital Analysis and Review (CCAR), the threat of too big to fail continues to rise.
All of this while Wall Street banks are pushing to slash financial regulations further and elevate the risks held by the biggest banks, ultimately continuing to put the global economy on course for disaster.
At one point in time, banks were a means to lend money to businesses and individuals that had wanted to create jobs, products and services. To put it simply, banking was a way to expand the U.S economy and to promote innovation.
Since then, Wall Street has taken the ability to make high risks, high rewards into a speculative free-for-all culture. This highjacking put incredibly negligent bets above logical rationale.
The Fed: A Stress Test of Too Big to Fail
What the Fed has done is not only allow for such risks to continue, it has institutionalized a system where risk is subsidized by the government with bailouts and cash injected spending programs.
By allowing derivative exposures to rise higher than they were in 2008, the Federal Reserve has allowed too big to fail to be propped up once again. The major risk is that this time the exposure, complexity and risk is even higher — and the fall will be …read more
Source:: Daily Reckoning feed
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