Stress Tests Boosting Confidence

Wednesday, March 14, 2012 10:20
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Stress Tests Boosting Confidence

Tags: banks | financials | investor behavior

The 2008 crisis gave new birth to the stress test—a mechanism for measuring the ability of a bank to withstand the pressures of a financial crisis. The Fed is still conducting these tests in an effort to ensure banks’ ability to survive even worse crises. The Dodd-Frank Act has shifted the focus to systemic risk, emphasizing bank strength and safeguards against undercapitalization in such events.
 
The stress tests also serve as an economic booster, assuring markets, investors, and consumers that the banking sector is strong and healthy. Having met the tougher standards also helps banks compete and gain market share. With a lack of trust still lingering in the investing public, stronger banks will have an obvious advantage. Perhaps the greatest advantage will be the restoration of confidence should another 2008-style debacle occur. In a global marketplace, such a debacle could come from sources outside the US. Bank strength may help deflect concerns and support what might otherwise be a shaky financial system.

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