Fed Stress Test Will Show Signs of Healthier Banking Industry

Every year the Federal Reserve runs a doomsday scenario on the U.S.’s 19 largest banks: How would those banks handle a 13 percent jobless rate, a 50-percent drop in stocks, a 21-percent decline in housing prices and a significant contraction of other major world economies.

What makes this year different? This will be the first year since 2009 that the Reserve will release the results of said stress test.

Early chatter suggests that balance sheets will be stronger, leading many to think that the banking industry is better prepared for any future fiscal challenges that may present themselves.

Compare that with 2009, where the Fed found significant holes — “in the tens of billions of dollars” according to The New York Times.

That news, combined with better unemployment numbers and more consumer credit spending, are all considered signs that recovery from the Recent Financial Troubles continues apace.

Other highlights:

• The examination is not merely an intellectual exercise. If institutions fall short, they could be required to raise billions in new capital, depressing their shares.

• If they pass, dividend increases and stock buybacks by the strongest institutions will follow as they did after the second round of tests a year ago, pleasing investors whose banks’ stocks still trade at levels far below where they where before the collapse of Lehman Brothers in September 2008.

• In addition to a 50 percent stock market decline and an 8 percent contraction in real gross domestic product, the tests envision an unemployment rate of 13 percent, well above the 10.2 percent peak recorded in October 2009.