Fed’s latest report on banks’ stress tests

March 12th, 2012

The Federal Reserve is set this week to release their report on the latest stress tests of the 19 largest financial institutions in the U.S. Mark Williams, who teaches finance at BU’s School of Management, is a former Federal Reserve Bank examiner. He is also the author of Uncontrolled Risk: The Lessons of Lehman Brothers. He offers the following comment on what the Fed should say about the report:

“How the Fed responds to stress testing resultsĀ  will determine whether they can rebuild market confidence lost over the last four years of regulation. Stress test results will demonstrate that the biggest U.S. banks are on the mend but the Fed needs to use this opportunity to encourage banks not to increase dividends but to continue to rebuild their balance sheets.

“Since 2008, banks have lost billions in capital on risky real estate bets and weak credit practices. Europe is still not out of the woods and political missteps could still pull the U.S. economy back into recession and harm its banks.

“The Fed should make it clear that the stress tests results show a patient that is recovering but not one that is cured. The Fed needs to demonstrate that it will be a tough regulator and take a preventative posture to minimize the change that excessive risk taking and undercapitalized banks are allowed to roam U.S. markets.”

Contact Williams at 617-358-2789; williams@bu.edu

Post Your Comment