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Friday, March 29, 2024

Big Banks May Get a Jolt When Fed Releases Final Results of Stress Tests Today

Courtesy of Pam Martens

Fed Chair Janet Yellen Takes Her Seat at an Open Meeting of the Federal Reserve Board of Governors on November 30, 2015 to Vote on a New Bailout Rule

Fed Chair Janet Yellen Takes Her Seat at an Open Meeting of the Federal Reserve Board of Governors on November 30, 2015 to Vote on a New Bailout Rule

Today, at 4:30 p.m., the Federal Reserve is scheduled to release the second leg of its annual stress tests of 33 banks holding $50 billion or more in total consolidated assets. The first leg of the tests was released last Thursday with all 33 banks getting a passing grade in terms of meeting the minimum capital cushion required. Today’s final round, called the Comprehensive Capital Analysis and Review (CCAR), will determine whether the banks are allowed to continue or increase dividend payments, conduct share buybacks or issue secondary stock offerings. This is the sixth annual round of stress tests conducted by the Fed since the financial crash in 2008.

In addition to the regular stress tests, eight large banks with significant trading and/or clearing operations are required to show losses if a major counterparty defaulted. Those banks are: Bank of America, Citigroup, Bank of New York Mellon, Goldman Sachs, JPMorgan Chase, Morgan Stanley, State Street Corp. and Wells Fargo.

In the data released last Thursday, the Fed showed a total loss of $52.6 billion at all eight banks combined on derivatives, securities lending, and repurchase agreement activities should a major counterparty default. Wall Street veterans are highly skeptical that $52.6 billion captures the reality of the problem when those same banks are holding hundreds of trillions of dollars in notional amounts of derivatives and the tally has grown since the epic crash of 2008.

It’s tough to believe that $52.6 billion would cover the tab because at the big insurer AIG, which received a $185 billion taxpayer bailout in the crash, over half of that amount went out the back door as a stealth bailout of the big banks. A total of $93.2 billion was paid by AIG to Wall Street and foreign banks for their derivative bets and securities loan transactions.

Since the size of the derivative exposure has grown and become more interconnected, why would the losses be expected to diminish in the next crash?

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