The US Banks Economic Stress Testing Results

Steven Petrov

The Paw Print

Economic stress tests are an often used as a method in determining the bank industry’s readiness to withstand any sudden change in the market sentiment which will subsequently lead to a major economic crisis. The test aims to see if every single bank is able to react accordingly and has the needed protection against situations of major stock market crash and a 10% unemployment rate. The most recent stress test examined 31 of the largest US financial institutions and gave an individual evaluation of each and every one of them.  The majority of the banks performed really well under these imaginary severe market conditions, which definitely brought some additional reassurance among US businesses and clients that The Great Depression and the Great Recession would not occur again. However, 2 of the tested banks were near an absolute collapse and delivered poor overall results. These two banks were “Goldman Sachs” and “Zions Bancorporation.” The second company has always struggled in passing severe stress tests and has delivered poor results many times before, but the data coming out of “Goldman Sachs” was definitely a major surprise for the markets. Such a performance under severe market conditions was never expected, because ever since the 2008 economic crisis, “Goldman Sachs” has been trying to restore peoples’ trust in their business model. As the largest investment bank in the world that has been through so many different economic collapses, “Goldman Sachs” is expected to be the best-prepared bank for any sudden and unexpected collapse. However, the reality is obviously far from that. The second part of the stress test will be taken in the following week and some more detailed information regarding the specific areas that these banks have failed the test will be announced.  While there were only two financial institutions that failed the first phase of the test, it seems that few more will be joining the “failed list” after the second phase of testing. Judging by the management of their respective capitals, the analysts predict that the US branches of Deutsche Bank and Santander will most likely turn out to be unable to withstand any significant and major economic collapse. The reason analysts are worried for the second pair of worrisome banks isn’t in their current reserves but rather in the fact that the market will recognize their overall weakness during a potential collapse quickly. This will lead to an inevitable increase of their capital borrowing costs. It seems that the banks are also expecting their own respective poor results in the 2^nd phase of the stress test and have already started the process of changing and improving their practices. For example, “Santander” has officially announced major management changes at the highest company level. The financial markets usually take such tests really seriously, but there have always been doubters that do not believe in such economic stress tests’ effectiveness in accurately evaluating banks’ potential to withstand a real crisis. The famous investor Ralf Segal believes that these tests represent a classical example of deliberately creating an unrealistic perception of how a potential collapse may play out and will quickly be shattered by the next crisis.