Stress Tests May Favor Wall Street Banks Over Regional Ones

Strategic Insights -

As the Federal Reserve prepares to release its methodology for the ongoing "stress tests" of the 19 largest U.S. banks, concerns are emerging that the tests may be tilted in favor of Wall Street banks over their regional counterparts. This is due to the methodology, which assumes no further losses on complex securities, but a 20% increase in losses on individual loans. This approach may favor the Wall Street giants, which hold significant pools of securitized loans, over regional banks involved in traditional banking.

Key Takeaways:

  • The stress tests, designed to determine which banks are healthy and which may need more capital, may have a methodology that favors Wall Street banks over regional ones.
  • The test assumes no further losses on complex securities, but a 20% increase in losses on individual loans, which may favor Wall Street giants with large pools of securitized loans.
  • The results of the stress tests are expected to be released on May 4, 2009, with no "pass" or "fail" outcome.
  • Critics may cry foul if too few banks show signs of problems, and the failure of one or more of the Wall Street giants could severely impact the FDIC's insurance fund.
  • Additionally, if regional banks like KeyCorp, Huntington Bancshares, and Zions Bancorp are impacted significantly, it could create a ripple effect in the financial system.

Statistics:

  • The Fed is expected to release its methodology for the stress tests on Friday, with results to be released on May 4, 2009.
  • The test methodology assumes a 20% increase in losses on individual loans.
  • According to Comtex SmarTrend, Bank of America (BAC) has been in an uptrend since November 28, 2008, while Goldman Sachs (GS) has been in an uptrend since November 25, 2008.
  • Conversely, Huntington Bancshares (HBAN) was in a downtrend as of April 18, 2009.

Sources:

  • "Wall Street Banks May Get a Pass from Stress Tests" by Eric Rothmann & Neena Mishra, Zacks.com via COMTEX, April 22, 2009.
  • "SmarTrend" by Comtex News Network, Inc., April 18, 2009.