Stress Tests 2014: Can Banks Withstand Increasing Interest Rates?

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Investors and analysts alike are confident the six largest United States financial institutions — JPMorgan Chase (NYSE:JPM), Bank of America (NYSE:BAC), Citigroup, Wells Fargo, Morgan Stanley, and Goldman Sachs — will pass the annual stress tests conducted by the Federal Reserve and show they are able to withstand prolonged market stress like the financial industry experienced between June 30, 2008 and December 31, 2008 — the worst of the financial crisis. The results, which are set to be released March 20, will likely reflect both increased capital levels and the experience banks have amassed in the numerous tests conducted since 2009. “We know the banks have enough capital, that’s not the question,” Sterne Agee & Leach analyst Todd Hagerman told Bloomberg in an interview. “It’s more about whether there is something in the capital-planning process that the Federal Reserve might object to.”

On the eve of 2014 stress tests, a source familiar with the Federal Reserve’s thinking told CNN’s Fortune that the central bank recently informed several banks that it requires more data on their trading operations, and an official request is expected to come in the next few days. More specifically, the publication’s sources believe the Fed will ask banks to show how their trading operations would perform under as many as ten different economic scenarios, all related to changes in interest rates.

In the more than five years that have passed since the financial crisis, America’s largest financial institutions have been under intense legal and regulatory scrutiny. After the financial crisis, politicians and regulators searched for a means to repair the structural problems within the United States and the international banking system in order to insure that a similar financial meltdown would never happen again. Of course, legislation was at the forefront of those efforts. While its effectiveness has been debated, the Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law in July 2010, brought the most significant changes to financial regulation in the United States since the reform that took place following the Great Depression. Chief among its provisions, alongside the so-called “Volcker rule,” which was intended to reduce banks’ ability to take excessive risks, are stress tests.

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