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In recent weeks, Federal Regulators have been conducting so-called stress tests at 19 of the US largest financial institutions. The tests were designed to determine just how well or not these most important US banks are able to hold under their current bad loans. These banks are the so called "Too big to fail" banks and as a group, they hold an estimated 2/3 of the assets in the whole US banking system. Among those being tested are JPMorgan Chase, Bank of America, Citigroup, Wells Fargo and Goldman Sachs.
These bank stress tests are important because they could improve public confidence in the financial system. In large part, the economy is hurting because investors lack confidence and the banks themselves are unsure about lending more money even to each other.
One scenario looks at how banks would fare over the next two years based on how the economy was doing in February. The second, more important scenario assumes the economy will sink into a deeper recession than analysts expect. They are also term as baseline and a adverse scenario. Read more...