Fed plans new round of bank stress tests in response to Covid-19

Link:  https://www.thebanker.com/World/Americas/US/Fed-plans-new-round-of-bank-stress-tests-in-response-to-Covid-19

Date: 15^th of October 2020

Media: The Banker

What happened?

Due to the ongoing uncertainty around the Covid-19 pandemic, the US Federal Reserve Board has announced another round of bank stress tests to see how large banks stand up against two scenarios featuring severe recessions.

Whom and where it affects?

Firstly, it affects US-based banks and financial institutions, especially those with large trading or processing operations, because their strength and solvency will be tested.

It also affects all creditors of those banks, as the results of the tests will give them insight into the banks’ capital strength under a tailored set of assumptions, given the ongoing coronavirus-related uncertainty.

Finally, it indirectly affects everyone, as the strength and health of the international banking system is something that has effects on our daily life.

What sort of public or private institutions are involved?

The most important institution involved in this piece of news is the US Federal Reserve, which is the central bank of that country and the competent authority for carrying out stress tests, which are now needed because of the fragile economic situation due to the Covid-19 pandemic.

Also, private banks are important in the article because they will be subjected to those stress tests, what means that their resiliency is going to be evaluated by the FED.

Why is it important for Banking and Finance?

As we are facing a pandemic that is affecting all aspects of our lives, the strength of the international financial system is a fundamental key to prevent possible future crashes.

Therefore, it is important to evaluate the health of the most important financial institutions worldwide, especially private banks, because we need to know if they would be capable of resisting to an adverse economic scenario derived from the pandemic. Depending on the results of those tests, the confidence in the financial system will either increase or decrease.

What do you think will be the consequences in the foreseeable future?

If the results are positive and banks can demonstrate their solvency and strength despite the adverse financial situation, creditors and investors would be more willing to keep investing on them, and therefore, the economic situation might improve, as those investors would maintain their confidence in the system. That could also reduce the impact of the pandemic in the economy.

However, if banks fail those tests, the confidence in the banking system would plummet, and consequently depositors and investors might want to withdraw their money, what would lead to a bank failure that could easily extend to the rest of the institutions because of the adverse situation resulting from the pandemic.

Key words

Stress test, banks, FED, scenario, economy, pandemic.