‘Stress tests’ show stronger banks

WASHINGTON (AP) ― The Federal Reserve’s annual “stress tests” of major U.S. banks have become better able to detect risks, Chairman Ben Bernanke said Monday night. He said the tests show that the banking industry has grown much healthier since the financial crisis.

Speaking in Atlanta, Bernanke noted that this year’s tests showed that 18 of the biggest banks had collectively doubled the cushions they hold against losses since the first tests were run in 2009. He says the tests are providing vital information to regulators.

The latest test results were released last month. They showed that all but one of the 18 banks were better prepared to withstand a severe U.S. recession and an upheaval in financial markets. The tests are used to determine whether the banks can increase dividends or repurchase shares. 

Bernanke’s comments came in a speech to a financial markets conference sponsored by the Federal Reserve Bank of Atlanta. He said he viewed the first stress test conducted in 2009, months after the financial crisis struck, as “one of the critical turning points in the crisis.”

“It provided anxious investors with something they craved: credible information about prospective losses at banks,” he said.

Bernanke said that in the ensuing years, the Fed has worked to improve the stress tests so they could serve as a resource for banking regulators to monitor and detect threats to the financial system.

The stress tests have been criticized by some banks because the central bank has kept secret the full details of the computer models it is using to evaluate each bank. The Fed has defended this practice. It has argued that it is similar to teachers not giving students specific questions that will appear on a test to guard against students memorizing the answers.

“We hear criticism from bankers that our models are a ‘black box’ which frustrates their efforts to anticipate our supervisory findings,” Bernanke said. He said that over time, the banks should better understand the standards the tests are measuring.

In this year’s test, the Fed approved dividend payment plans and stock repurchase plans for 14 of the 18 banks outright.

Two of the banks, JPMorgan Chase and Goldman Sachs, were told by the Fed that they could proceed with their plans but would need to submit new capital plans. Two other banks, Ally Financial and BB&T, were forbidden by the Fed to go through with their dividend increases and share buybacks.

Ally Financial, the former financing arm of General Motors, fared the worst on the stress test. The Fed’s data showed that Ally’s projected capital level was below the minimum the Fed thinks a bank would need to survive a severe recession. Ally officials said they believed the Fed’s testing models were unreasonable.

BB&T, based in Winston-Salem, North Carolina, said it would resubmit its capital plan and that it believes that it will be able to address the factors which had led to the Fed’s objections.