One Man’s Opinion: Will The Fed’s Stress-Test Results Stimulate US Lending?

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92835431The latest stress test by the US Fed showed all but one of the 30 largest banks has enough capital to withstand a deep recession. Zions Bancorp was the only lender that came in below the Federal Reserve’s main capital threshold. This is obviously good news for American banks and borrowers, said Frank Keating, President of the American Bankers Association.

In the last five years, US banks have doubled their capital, which helped them pass this extreme test. For the first time in history, 30 of the largest banks were measured and 29 made the mark, which is good news for the US banking system, he said.

Asked if the current capital levels could be lowered to enable the banks to lend more, Frank said the Fed is supposed to run these tests every year anyway. The tests include extreme scenarios like a 50 percent collapse in stock markets and housing price levels slumping to 2001 levels, which may or may not take place in near future.

But it’s good to do stress tests and bank CEOs would probably like to look at the segments that have done well and the segments that would require improvement. But overall, its good news for American banks that want to lend and that should kick-start the economy again, he noted.

Asked to comment about the possible measures that can accelerate growth, Frank said it’s important to give confidence to small US businesses. Two-thirds of the nation’s jobs are created by small businesses and there should be reasonable certainty about tax levels and the regulatory framework.

A huge chasm is likely to show up in the next 5-to-10 years. In terms of public debt and budget deficit, the economy faces huge challenges. Debt levels doubled under President Bush earlier and then doubled again after President Obama came in; at $17 trillion, public debt is no longer sustainable.

Small businesses pull back on the hiring side because they believe if the government can’t pay its bills and the costs keep mounting; it’s likely business costs would rise as well. These are the issues that need to be addressed and hopefully Congress can come together and address them, he observed.

Asked to give his perspective on the latest development where President Obama and Russian President Vladimir Putin have targeted individuals, Frank said it depends on who the individuals are. If governments target individuals, they should target those people where sanctions could have profound impact. The options are limited though, and actions should be sensible that can change behaviors, he concluded.

You can watch the video here.

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