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Federal Reserve: Every Bank Passed The Stress Test; Should The Fed Make The Exams Harder?

The building of the Federal Reserve Bank in downtown Manhattan in New York (AP Photo)
The building of the Federal Reserve Bank in downtown Manhattan in New York (AP Photo)

(International Business Times) – On Thursday afternoon, 31 of the largest U.S.-based banks got a clean bill of health from the Federal Reserve. In the first round of its annual stress tests, the Fed found that every bank holding more than $50 billion on its books would stay solvent enough in a deep economic downturn to continue operating.

The full results of the stress tests, including a subjective judgment of banks’ internal risk controls, won’t be publicized until March 11. But the 100 percent passing rate on the first phase, unprecedented since the tests began in 2009, raises questions about whether the stress tests could really foretell, let alone forestall, the next financial crisis.

Those concerns were underscored this week in a paper from Columbia University and a Treasury Department unit that suggested the Fed’s results have grown too predictable. “The pattern suggests a missed opportunity to diversify the types of stresses tested,” the authors warned.

Others share their worries. “There are obviously a lot of issues about how you choose the scenarios that you’re going to use,” said Robert Engle, a Nobel Prize-winning economist at New York University. Engle and his NYU team pioneered a novel way of measuring the riskiness of individual banks that he describes as complementary to the Fed’s process.

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