The Banking and Strategy Initiative

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Crisis Theater: A Global downward spiral for US Banks

Daniel Tarullo

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While the downdraft has been traced to Europe and forces Asian currencies and the entire common market into submission, Europe itself took brute force of the downturn ahead as signs for fiscal union while US looks at new stress tests after more than 20% downtick in banks in three weeks since the last Thursday of October (Check my sim portfolio for top 4 banks – JPM, GS, C plus retail and mortgage spclsts, WFC and BAC with a 20% hedge from KRS here )

For the new stress tests The cut off is a Tier I common of 5%, submissions by January and published results in March.


More stress tests..

The Fed announced new stress tests for US banks(FT) with 19 banks reporting capital levels publicly based on simulated scenarios for a 6.9% drop in EZ GDP as the Euro recession becomes a reality and a 13% unemployment rate in the US

Additionally the six biggest trading institutions including BofA and GS have to factor in a global market shock

“My baseline for all this is towards more disclosure and standardised and regularised disclosure,” said Daniel Tarullo, the Fed governor in charge of financial regulation. Last year’s results had less bank-specific information and the pledge of more published data has the potential to reassure or frighten investors.

BofA was separately warned to bring performance in line yesterday. Earlier BofA was not allowed to raise dividends and buy back equity. According to the fed, such restrictions will apply to even healthy banks that do not pass the stress tests or raise capital

In the first edition of the stress tests far reaching results went a long way for banks and invesors based on the then Tier I common ratios of US banks

More than 30 banks have to participate in the tests compared with 19 in previous years, including any bank with more than $50bn in assets. The smallest of the group have to provide less information to the Fed.


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