Every year, the U.S. Federal Reserve puts the country’s banks through a series of stress tests. These tests are designed to determine how banks will hold up against economic mishaps in the event of downward market trends. Good news for the U.S. economic system – all 31 banks tested passed; maybe not with flying colors, but they all passed.

 

The stress tests are mandated by the Federal Reserve following the financial crisis of 2008. They measure a bank’s abilities to sustain itself during certain hypothetical circumstances. Two examples of scenarios that banks are expected to maintain themselves through are the “adverse conditions” model, which includes an increase in treasury yields paired with weakening global economic activity, and the “severely adverse conditions” model, which boasts a 60 percent drop in stocks, 25 percent drop in housing prices, a 4.5 percent fall in gross domestic product (GDP), the price of oil reaching $110 per barrel and long-term treasury issues seeing a 1 percent fall before making a slow ascent back up. Yikes – stress test is right.

 

While all the banks made it through this first round of testing, (it’s not over for them yet) some just barely fell above the mark. Six banks fell within 2 percent of the minimum requirements for the “total risk-based capital ratio” – BBVA Compass Bancshares, Citigroup, Goldman Sachs, JP Morgan Chase, Morgan Stanley, and Zions Bancorporation. Even more banks came up close to short on the “Tier-1 leverage ratio”. The first six fell in that group and then were joined by Bank of America, BNY Mellon, BMO Financial, HSBC North America, and State Street.

 

Another round of test results, ones that are deemed more important in fact, will be released on March 11. For now things look good for the U.S. banking systems, but we’ll have to reevaluate that standing once all the data is available.