Bernanke Stays Stands Behind Stress Test Results in Atlanta Fed Speech

Michael Teague  |

Speaking of America’s largest financial institutions, Federal Reserve Chairman Ben Bernanke defended the methods and results of the most recent round of stress tests of the country’s largest banks, noting that “Higher capital puts these firms in a much better position to absorb future losses while continuing to fulfill their vital role in the economy.”

He also tied the current state of the banks to the stress-tests themselves. While noting that the banks were now in a stronger position than the one they were in just a few years ago, Bernanke made sure to remind the audience at the Atlanta Fed’s 2013 Financial Markets Conference that “the use of supervisory stress tests- a practice now codified in statute -has helped foster these gains.”

14 of the 18 banks tested according to provisions of the 2010 Dodd-Frank Act passed the Fed’s capital requirements measures on the first try, and had their share buyback and dividend payout plans approved. J.P. Morgan Chase (JPM) and Goldman Sachs (GS) were approved provided they resubmit their plans with minor adjustments, while Ally Financial (ALLY), formerly the finance wing of General Motors (GM), and BB&T (BBT) had their plans shot down, with the latter saying it is confident that its revised plan will pass muster.

The speech was delivered at a time when there is increasing bipartisan demand in Washington for something to be done about the too-big-to-fail banks that were instrumental in the 2007-2008 financial crisis from which the economy is still recovering.

With Senators Sherrod Brown (D-Ohio) and David Vitter (R-Louisiana) currently in the process of drafting legislation that would increase capital requirements for the big banks, similar efforts are taking place in the House of Representatives. While any such legislation will face tougher resistance in the House, opposition to the notion of too-big-to-fail has increasingly become a mainstream concept, especially with some banks making record profits since the collapse of the economy not five years ago.

Bernanke also connected the Fed’s quantitative easing policy that has pumped $85 billion a month into the economy and kept interest rates at all-time lows to the steady and gradual drop in unemployment, at 7.6 percent as of the Labor Department’s report last Friday.

The Chairman has previously said that the Fed’s monetary policy will remain unchanged until such time as the economic recovery currently underway becomes sustainable. Monday’s speech did not address the issue of how much longer QE will remain in its current form, but Bernanke praised a “significantly stronger” economy, “although conditions are clearly still far from where we would all like them to be.”

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