Do Stress Tests Prove U.S. Banks Are Back on Track?

In the four 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 international banking system in order to insure that a similar financial meltdown would never happen again.

To assess the health of these companies that brought the American economy to its knees, Congress mandated that the Federal Reserve conduct annual stress tests on the 19 largest firms, and the results are in. The central bank announced Thursday that the majority of the banks tested would be able to survive a severe recession and a crash in the markets.

Back in November, the Federal Reserve issued instructions to banks for how they should prepare their submissions for its capital planning and stress testing program, which would be evaluated against a number of quantitative and qualitative criteria. The most important measure analyzed was capital levels. As a key indicator of financial strength, capital levels are important to the financial system and the broad economy because they acts as a cushion to absorb losses so that taxpayers are not hit with that burden…