These days it seems bank is a four letter word and the bankers who get bonuses are bad, as bad as any comic book villain. All the fuss about banks passing the government’s “stress test” makes the average American want to say, “Who cares?”
Well, unfortunately we all have a stake these days in how the banking industry is doing, and not just because our tax dollars have financed multi-billion dollar bailouts. The health of the banking industry is a direct reflection of the health of the economy, and we all pay the price or reap the benefits to some degree.
The stress test applied to 19 of the largest banks in the country was carried out by the Federal Reserve to indicate the solvency and future viability of the different banks. In general, the results were more positive than negative. Bank of America was told it would need an additional $33.9 billion in capital to weather any future economic storms. Banks are likely to raise the necessary capital through asset sales, future profits, and raising capital from private investors.
In fact, the Associated Press reported that “10 of the nation’s 19 largest banks need a total of about $75 billion in new capital to withstand losses if the recession worsens. The Federal Reserve’s findings show that the financial system, Like the economy in general, it’s recovering, but it’s not healed yet.”
While it wasn’t great news, it wasn’t exactly bad news. In the days since the test results were announced, and even as the first news about the government’s findings leaked, the stock market has continued to slowly rise. Investors appear to be tentatively sticking their heads out of the trenches as the smoke clears from the battlegrounds of this recession.
But in many ways it also means that the battle continues for the average American. Banks that need to raise money are likely to find ways to get some of those funds out of the little guy through higher fees on bank accounts and credit cards, as well as increases in interest rates. In theory, stress test results are supposed to put everyone at ease and thus get the credit flowing. Banks that “passed” the test, such as JPMorgan Chase & Co. and American Express Co., are expected to be more willing to extend credit than they were last year.
Or, as Justin Fox recently put it in his “The Curious Capitalist” column for Time magazine, it’s time for banks to go back to “boring” banking. He argues that the current financial chaos was caused by so-called shadow banks that veered away from well-established banking practices and instead engaged in “bad mortgage loans, collateralized debt obligations, and all sorts of other foolish lending decisions.” “.
What’s left of the banking industry now are the hardcore FDIC-insured banks that have made money the boring way for decades. Fox argues that the rise of other financial institutions, such as investment banks, hedge funds and banks focused solely on home loans, took business away from banks. Eventually, banks like Citigroup and many others began to venture into shadow banking to compete with companies like Goldman Sachs. The rest is painful history. It may take some time, and we will all continue to pay the price for all that dark prosperity of the past, but hopefully the banks are on the road to a dull recovery. Bored is good news for the little one.