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Thirty-four major US banks to conduct stress test amid COVID-19 pandemic


Thirty-four major US banks to conduct stress test amid COVID-19 pandemic

Federal Reserve System (FRS) Definition

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As the COVID-19 pandemic continues to ravage the global healthcare system, 34 major US banks are today preparing to test the ability of the financial sector to weather the crisis.

In response to the 2008 financial crisis, the US Congress passed the Dodd-Frank Act, which requires banks with over $100 billion in assets to keep at least 10% of the deposits in reserve as a safety net. These banks undergo annual “stress tests” that model economic calamities to understand how prepared they are to respond to the financial crisis.

The banks will today submit response plans to the Federal Reserve concerning a theoretical economic crisis—an annual stress test that does not account for the COVID-19 pandemic. The companies’ response plans will model the impact of a 10% unemployment rate on the stability and liquidity of the financial sector. With firms like Goldman Sachs predicting a US unemployment rate of 15% by mid-year and a 34% quarterly GDP contraction, it is unlikely that today’s stress tests will inspire confidence.

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On March 15, the Federal Reserve decreased the deposit ratio to 0%, in an attempt to inject cash into the US economy. However, if the US economy contracts further than expected and the depositors withdraw funds, there will be insufficient cash on hand to pay them. But the unlimited liquidity of a 0% environment means that banks may not require federal bailouts and could theoretically strengthen the system to short-term shocks.

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