Tags: Federal Reserve | bank | stress | tests

Economist Abrantes-Metz: Fed Stress Tests on Banks Are Inadequate

By    |   Wednesday, 19 March 2014 01:29 PM

The stress tests that the Federal Reserve is conducting on the country's largest 30 banks — with results due March 20 and 26 — aren't sufficient to prevent another financial crisis, says Rosa Abrantes-Metz, a director at Global Economics Group and an adjunct economics professor at New York University.

"The Fed's decision to implement more complex stress tests doesn't address what caused the financial crisis of 2008," she writes in The Wall Street Journal.

"Stress tests have been oversold. First, the choice of financial scenario determines the outcome." If regulators stipulate a housing slump as part of the test, banks with large mortgage portfolios will get hit, Abrantes-Metz says.

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If regulators instead test a tanking labor market, banks with large credit-card portfolios will take it on the chin.

"The stress scenario is never—by definition—the expected scenario, Abrantes-Metz writes. "It's a risk scenario. There are many equally unexpected scenarios, but only one is picked."

There may be a good explanation for regulators' choices, such as concern of home price declines, she says.

"But why go through the trouble to model all of these complex relationships statistically? Why don't regulators simply require banks with large mortgage portfolios to raise more capital?"

The banks hope to pass the tests with flying color, so they can pay out more than $75 billion in stock buybacks and dividends, Bloomberg reports.

"We know the banks have enough capital, that’s not the question,” Todd Hagerman, an analyst at Sterne Agee & Leach, told the news service. "It’s more about whether there is something in the capital-planning process that the Federal Reserve might object to."

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The stress tests that the Federal Reserve is conducting on the country's largest 30 banks aren't sufficient to prevent another financial crisis, says Rosa Abrantes-Metz, a director at Global Economics Group and an adjunct economics professor at New York University.
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2014-29-19
Wednesday, 19 March 2014 01:29 PM
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